SOURCE: The Daily Mail
The Chancellor suffered a new blow yesterday when the International Monetary Fund slashed its growth forecast for Britain.
The financial watchdog predicted the UK economy would grow at a minuscule rate of 0.2 per cent this year and just 1.4 per cent next year.
That is 0.6 percentage points less for each year than the IMF forecast at its spring meeting in April and underlines the mammoth task ahead for George Osborne as he seeks to fire up the economy.
Yesterday the Government unveiled plans to update the railways, but the £9billion of new investment to do so will not start until 2014, making it too late to have any immediate impact on production and growth.
Business is placing more hope in the £80billion ‘Funding for Lending’ scheme unveiled last week and designed to funnel cheaper loans to small companies and home buyers.
But leading bankers claim the demand for credit simply isn’t there because of low confidence caused by the crisis in Europe.
The IMF blames the chaos in the eurozone for its decision to lower its forecast for the world economy and Britain.
‘Financial market and sovereign stress in the euro area periphery have ratcheted up to end-2011 levels,’ it says in its summer update.
As a result, it expects the world economy as a whole to grow by just 3.5 per cent, against its previous forecast of 3.9 per cent.
The eurozone crisis is continuing to have a negative impact on the UK economy, the IMF warned
It believes the single currency area will be in recession this year, with output falling by 0.3 per cent. Growth in the region in 2013 is predicted to be just 0.7 per cent. Among the bigger European economies, the IMF predicts a deep 1.6 per cent loss of production in Italy and a 1.5 per cent fall in output in Spain, with both economies staying in recession next year.
The organisation says it is ‘time for action’ if Europe is to come out of its freefall and stop dragging the rest of the world down with it. It calls on European leaders to follow through on promises made at their recent summit, including progress on banking and budgetary reforms.
As a result of slower growth, the IMF warns the improvement in Britain’s budget deficit will be slower than expected, with borrowing remaining at 8.1 per cent of total output this year and 7.1 per cent next year. That is 0.5 percentage points worse than previously forecast.
Slower growth means less tax income from companies and households, and higher costs for the Government because of increasing unemployment and welfare bills.
The IMF urges advanced non-eurozone economies such as Britain ‘to respond effectively’ to the growth crisis by pushing ahead with further ‘unconventional measures’ such as quantitative easing. It has urged Britain to cut taxes and proceed with infrastructure projects this autumn if growth fails to materialise.
Output in Britain is still more than 4 per cent below where it was before the financial crisis hit hard in 2008-09 and the UK is among the few advanced countries where lost ground has not been made up.
Shadow Chancellor Ed Balls called on the Government to get recovery back on track by ‘taking urgent action to boost the economy’.
The Treasury said: ‘The IMF explain that “growth is projected to remain relatively weaker than in 2011 in regions connected more closely with the euro area”.
‘Because the euro area is the UK’s largest trading partner we are now feeling the effect across our economy. ‘But as the Chancellor said last week, we are not powerless to act in the face of the European debt storm: that’s why the Treasury and the Bank of England are taking co-ordinated action to inject new confidence and support the flow of credit to where it is needed in the real economy.’