IMF cuts UK growth forecast to 1.1% and questions pace of cuts

George Osborne warned that slower pace of deficit reduction will have to be adopted if economy continues to struggle The International Monetary Fund has cut its growth forecast for Britain for the third time in nine months and warned George Osborne that further underperformance would warrant a policy U-turn. The fund said the UK continued to struggle and advised that a slower pace of deficit reduction would be necessary were the economy to continue to expand less rapidly than expected. While sparing Osborne the embarrassment of a call for an immediate change of course, the IMF pulled no punches in criticising European policymakers for failing to sort out the eurozone’s problems. Following the credit downgrade of Italy by the ratings agency S&P, the IMF’s economic counsellor, Olivier Blanchard, urged Europe to “get its act together” and the fund issued a “call to arms” to prevent Europe’s leaders losing control of the crisis. “There is a wide perception that policymakers are one step behind the action in markets,” said Blanchard. “It is a major source of worry.” The IMF’s half-yearly World Economic Outlook said low borrowing costs meant Britain had the scope to cut its deficit more slowly but that it should not do so yet. Jorg Decressin, an IMF economist, said: “Policy should only be loosened if growth threatens to slow down substantially relative to what we are forecasting.” The IMF said it was cutting its growth forecast for the UK to 1.1% this year – down from 1.5% in June, 1.7% in April and 2% at the start of the year. It also predicted a more sluggish recovery in 2012, with activity expanding by 1.6% against the 2.3% it was predicting just three months ago. Fund economists believe that only an improvement in Britain’s trade performance will prevent the economy returning to recession this year. Domestic demand is expected to contract by 0.5%, the weakest of any country in the G7. Ed Balls, the shadow chancellor said: “These are deeply concerning forecasts for both the UK and world economy. Our chancellor and political leaders in Europe need to wake up to the scale of the problem and finally realise that we need economic growth and more people in work to really get deficits down.” A Treasury spokesman said: “It is welcome that the IMF have forecast that the UK will grow more strongly than Germany, France and the eurozone next year, but it is clear that the UK is not immune to what is going on in our biggest export markets, with every major economy seeing lower forecasts for growth this year and next.” He stressed that the government had no intention of backtracking on a deficit-reduction plan that had delivered stability for the UK. The IMF cut its forecast for global growth to 4% for both 2011 and 2012 but said risks were heavily skewed to the downside. It warned that a failure to tackle Europe’s sovereign debt crisis and a continued policy impasse between Democrats and Republicans in the US could result in a double recession for the developed world, which it said was already projected to grow at an anaemic pace in 2011 and 2012. The fund said the US Federal Reserve should “stand ready” to provide more stimulus to the world’s biggest economy through “unconventional support”, and financial markets rallied in anticipation that the central bank will signal fresh action when it concludes a two-day meeting on Wednesday. The Fed has already provided two doses of quantitative easing, the creation of electronic money through the purchase of financial assets, and Wall Street was hopeful on Tuesday night that the recent softening of demand will lead to a third boost in the coming months. Shares in the City rose on Tuesday, with the FTSE 100 Index closing more than 100 points higher. Shares on Wall Street were also higher in early trading. IMF Economics Global economy George Osborne Economic policy Economic growth (GDP) Public finance Larry Elliott guardian.co.uk

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