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UK sole major EU economy downgraded by IMF
The IMF has cut growth expectations for the UK for this year to 1.7%, down 0.3% from its previous prediction in January.
Its forecast for UK economic growth in 2012 remained unchanged at 2.3%.
In its latest World Economic Report, released last night, the IMF said financial conditions continue to improve after the global crisis, although they remain unusually fragile.
The UK fares worse than other major European economies in the report, which shows Germany’s projected growth revised up by 0.3% to 2.5% for this year, and by 0.1% to 2.1% the year after.
Growth expectations for France are on track at 1.6% this year and 1.8% in 2012, unchanged since the January report.
Italy’s forecast has been scaled up 0.1% for this year, and is on track for next, and in Spain growth has also been revised up 0.2% this year and 0.1% next year.
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The IMF report emphasised the need to keep interest rates low in advanced economies like the UK in order to strengthen their recovery.
However it noted this will only be possible “as long as wage pressures are subdued, inflation expectations are well anchored, and bank credit is sluggish”.
At the same time, public spending will need to be put on a “sustainable medium-term path” by implementing “fiscal consolidation plans and entitlement reforms” – namely public sector and benefits cuts.
The IMF said this is particularly urgent in the United States to stem the risk of “globally destabilizing changes” in bond markets.
“To make a sizable dent in the projected medium-term deficits, broader measures such as Social Security and tax reforms will be essential,” it said.
But cuts must be supported by stronger fiscal rules and institutions, the report said.
In the euro area, the IMF’s assessment seems to contradict the European Central Bank’s recent decision to raise the base interest rate by 0.25% to 1.25%.
To curb fears about further sovereign defaults by eurozone countries under market pressure, it advised “sufficient, low-cost, and flexible funding to support strong fiscal adjustment”, as well as bank restructuring, and reforms to promote competitiveness and growth.
More generally, it said greater trust needs to be re-established in euro area banks through ambitious stress tests and restructuring and recapitalization programs.