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IMF Downgrades Britain's Economic Growth Forecast

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Britain's growth forecasts have been slashed by the IMF
Britain's growth forecasts have been slashed by the IMF

The IMF has slashed its economic growth forecasts for the UK and countries around the world as "intensifying strains" in the eurozone slow global recovery.

The British economy is now expected to grow at a rate of just 0.6% this year, instead of 1.6%, it said, while next year growth will reach 2%.

The development comes as the UK's national debt reached above £1 trillion for the first time. Figures released by the Office for National Statistics on Tuesday showed that debt has risen to £1,003.9bn, or 64.2% of GDP, up from £883bn a year ago.

The IMF warned that global output will expand at 3.25% this year, a downward revision from 4%, as the likes of Italy and Spain see their economies shrink and pull the rest of the single currency bloc into recession.

The UK economy will come under increased focus on 25 January when gross domestic product (GDP) figures are published for the fourth quarter of 2011 - revealing how close the country is to falling into recession.

The IMF said the greatest challenge was putting "an end to the crisis in the euro area by supporting growth" while restoring public finance balance sheets and sustaining economic recovery.

The UK is still expected to outperform Germany and France in 2012, which are expected to grow by 0.3% and 0.2% respectively, but will fall behind the US and Japan, which are expected to grow 1.8% and 1.7% apiece.

The significant downward revision to forecasts in the euro comes as the cost of financing sovereign debt surges and eurozone governments try to clamp down on spending, the IMF said.

The biggest risk to the economic outlook is the impact the eurozone crisis will have on bank funding and the downward spiral or "feedback loop" effect that can have.

Elsewhere, austerity measures in Japan and the US - or a lack of - pose a threat to the global outlook in the medium term, the IMF said.

Meanwhile, in a separate report, the IMF said risks to financial stability have increased, despite steps taken by European policymakers to address the issues.

The organisation said further action was needed to restore market confidence, which will require larger "backstops" for countries' financing and a sufficient flow of credit to the economy.

Looking ahead, the IMF said while budget deficits fell "significantly" in 2011, any adjustments this year should be done at a pace that supports growth and employment.

The UK GDP figures released tomorrow by the Office for National Statistics (ONS) are expected to show that the economy ground to a halt in the final quarter of 2011.

A fourth quarter contraction was until recently seen as the most likely outcome after warm weather in October and November hit sales of winter clothes and meant people used their central heating less.

But a better December fuelled optimism that the economy may have been flat in the quarter or even scraped meagre growth.

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