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IMF slashes UK growth forecast for 2012 and warns Eurozone‏

17 Jul

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.

The International Monetary Fund (IMF) has slashed its grow forecasts for the UK economy

The International Monetary Fund (IMF) has slashed its grow forecasts for the UK 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

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 squeeze on consumer spending continued to loosen its grip in June as inflation hit a 31-month low, figures tomorrow are expected to show. The consumer price index (CPI) measure of inflation is forecast to dip  to 2.7% in June from 2.8% in May, as fuel and food prices continue to  ease.
Last month, a sharp drop in commodity and oil prices paved the way for  the smallest rise in fuel prices since October 2009, dragging down the  headline inflation rate.
Inflation has fallen from 5.2% last September due to the waning impact  of the VAT hike at the start of 2011, falling energy, food and commodity prices and a number of bill cuts from utility providers in February.

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.’

 

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