Recession fears in UK after IMF downgrade

Fears of a double-dip recession were fuelled today as the International Monetary Fund (IMF) slashed the UK’s growth forecast and warned the global economy is in a “dangerous new phase”.

The UK will see gross domestic product (GDP) grow 1.1% in 2011, compared with the IMF’s latest World Economic Outlook report in April of 1.7%, and by 1.6% in 2012, compared with 2.3%.

The forecasts for the UK in 2011 fall behind projections for Germany, France, the eurozone, US and Canada.

The IMF said the US economy could be weak for years to come and warned that policymakers in the country must balance support for the economy with fiscal tightening.

The organisation, now led by former French finance minister Christine Lagarde, also said the forecasts were dependent on the eurozone debt crisis being contained.

The downgrade is the latest blow to the UK’s recovery prospects after the influential think-tank OECD cut its estimate for growth amid a raft of a disappointing economic data.

The UK Treasury said the British government remained committed to its tough programme of spending cuts and tax reform while the unions and opposition called on Chancellor George Osborne to rethink his plans.

The gloomy outlook is unlikely to deter Mr Osborne from his deficit-busting fiscal measures as the IMF has previously given full backing to his austerity measures.

A spokesman for the Treasury said the UK government remains committed to its deficit-busting plan.

He said: “It is welcome that the IMF have forecast that the UK will grow more strongly than Germany, France and the euro-zone 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.

“The government remains committed to implementing the deficit reduction plan which has delivered stability, a policy stance that Christine Lagarde described as ’appropriate’ earlier this month.”

Ms Lagarde earlier this month said the UK’s stance remained “appropriate” but “the heightened risk” meant a need for a “heightened readiness to respond”.

Mr Osborne said he was determined to continue with the austerity measures laid out last October in his Comprehensive Spending Review, which he has labelled “the rock of stability” on which the economy is built.

British Business Secretary Vince Cable said the warning from the IMF was “plausible”.

Speaking on BBC Radio 4’s PM programme, Mr Cable stressed the impact the 2008 credit crunch had on the economy.

“Getting that going again is difficult and it is even more difficult if our main markets – Europe, North America – are shrinking,” he said.

Elsewhere, the IMF said the outlook for advanced economies, including the UK, is for a “weak and bumpy” expansion.

Germany is forecast to grow 2.7% in 2011 while France is expected to show 1.7% growth, the US should advance 1.5% and Canada 2.1%. However, UK growth in 2012 should surpass both Germany and France.

The organisation said policymakers should pay particular attention to the eurozone crisis and weak activity in the US, which both threaten global growth.

The European Central Bank (ECB) must continue to intervene strongly to avoid problems in sovereign debt markets, the report said.

The eurozone debt crisis is showing no signs of abating as Greece hurtles towards defaulting on its debts and after Italy saw its credit rating downgraded by key agency Standard and Poor’s.

The IMF said the US Federal Reserve should be prepared to offer more emergency support to the country’s economy.

John Hawksworth, chief economist at professional services firm PwC, said: “Downside risks have risen significantly in recent months, so it would be wise for both governments and businesses to develop contingency plans in case such as double-dip scenario does emerge.”