UK economic growth forecasts slashed by worried IMF

The International Monetary Fund (IMF) has drastically cut its forecasts for UK economic growth over 2012 and 2013, as it warned that ‘intense’ financial risks to the global economy ‘loom large’.

Deteriorating eurozone sovereign debt markets, the impending US fiscal cliff, and slowing growth in emerging markets are among the risks flagged up by the IMF. It is also particularly concerned about banks: ‘uncertainties about the asset quality of banks balance sheets must be resolved quickly, with capital injections and restructurings where needed’.

Globally, the first quarter of the year was marginally better than the IMF predicted, with growth of 3.6%. But the fund has downgraded its outlook for this year and next to 3.5% and 3.9% respectively.

The stagnant UK economy, though, comes in for the biggest downgrades out of the advanced economies featured in the report. Growth of just 0.2% is forecast for this year, and 1.4% in 2013 after the projections for both years were slashed by 0.6% compared with forecasts made in January.

The fund doesn’t explain its rationale for the GDP cuts, though in past reports it has pointed to a combination of the worsening eurozone crisis and domestic woes including the lack of credit available to the businesses.

The UK’s cyclically adjusted (or structural) deficit will continue to decline this year and next, but by less than last year, the IMF says, ‘which is fitting given the weak growth outlook’. The report praises the government’s commitment to its debt-cutting plans.

US fiscal cliff threat

Although the need for immediate action to fix the eurozone crisis tops the IMF’s report, the fund is increasingly concerned about the ‘potentially severe’ economic effects of ‘political gridlock’ among US policymakers meaning they fail to avoid the fiscal cliff, when temporary tax cuts expire and deep spending cuts kick in.

The report warns that markets, which are assuming that the bulk of fiscal tightening will be deferred until later and that the debt ceiling will be raised in time to avert a default, have not yet priced in the risks: ‘As year-end approaches and uncertainty increases, another bout of political brinksmanship – similar to that seen in August 2011 in discussions of the U.S. debt ceiling – could trigger increased market volatility.’