IMF Inflicts 'Double Blow' On George Osborne

By Ed Conway, Economics Editor In Washington

George Osborne has suffered a double-barrelled embarrassment as the International Monetary Fund slashed its forecasts for UK growth by more than any other major economy and called for the Chancellor to reconsider his austerity plan.

The IMF said that Britain's economy will grow by a mere 0.7% this year and by 1.5% in 2014 – a 0.3 percentage point cut for each year. The combined cut for the two years is greater than for any other leading economy, including the US, Italy and Spain. Although the 2013 forecast is marginally stronger than that of the Office for Budget Responsibility's 0.6%, the 2014 forecast is markedly weaker than the OBR's 1.8%.

It came as the Fund warned in its closely-watched World Economic Outlook report that the world economy was in danger of moving from being a "two-speed economy" to a "three-speed economy" as the US picks up pace and Europe is left behind.

The report issued a specific rejoinder to the UK, saying that since "recovery is weak owing to lacklustre demand, consideration should be given to greater near-term flexibility in the fiscal adjustment path."

The Fund also put pressure on the Bank of England to consider more radical action to kick-start the economy, pointing out that the impact of the Funding for Lending Scheme "has been limited, encouraging mortgage lending more than lending to small and medium-size businesses."

The IMF's Olivier Blanchard has downgraded expectations for world growth

The report said: "In the United Kingdom, other forms of monetary easing could be considered, including the purchase of private sector assets and greater transparency on the likely future monetary stance. Greater near-term flexibility in the path of fiscal adjustment should be considered in the light of lacklustre private demand." 

The Fund has been critical of the Chancellor's austerity plan in recent years, arguing that if economic growth disappointed he would need to lessen the pace at which he is cutting spending and raising taxes.

However, a Treasury source pointed out that the UK is actually reducing the size of its deficit at a slower pace than the US. Britain is cutting its structural deficit by 1.1% this year and 1% next year, whereas the US is cutting it by 1.3% in each year. This is despite Britain starting from a position of having a bigger budget deficit in the first place.

However, the IMF report's language makes it clear that although at the Budget Mr Osborne raised his borrowing forecasts, it still believes he has not done enough to reduce the pain of austerity.

It said that in the UK "domestic rebalancing from the public to the private sector is being held back by deleveraging, tight credit conditions, and economic uncertainty, while declining productivity growth and high unit labour costs are holding back much-needed external rebalancing."

The report said that while economic conditions in much of the world were improving, the outlook for the eurozone remains poor, with the currency area projected to shrink by 0.3% this year, and France, Italy and Spain seeing contractions in GDP – the latter by 1.6%.

More worrying still was the fact that the so-called core area of stronger countries was displaying economic weakness, with Germany still generating less than 1% growth in 2013.

"This may call into question the ability of the core to help the periphery, if and when needed," the report said.

The Fund's chief economist, Olivier Blanchard, also warned that despite its relatively robust economic prospects the US needed to confront its own fiscal problems, saying: "it is worrisome that after three years of deliberations, policymakers have not agreed on a credible plan for entitlement and tax reform and that improvement in near-term prospects seems to have come with a decreased sense of urgency for progress."

The Fund said that the world economy would grow by 3.3% this year – a 0.2 percentage point cut, and left its forecast of 4% growth next year unchanged.

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