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IMF cuts UK growth forecast

07/08/2008

The International Monetary Fund (IMF) has cut its growth expectation for the UK economy over the next two years.

While the IMF predicted in July UK economic growth would total 1.8 per cent in 2008 and 1.7 per cent in 2009 that it predicted, this has now be downgraded to 1.4 and 1.1 per cent respectively.

Furthermore, inflation in the UK was recorded at 3.8 per cent, which is higher than expected, with inflation expectations rising even as economic activity was slowing.

This is slightly below of the government preferred measure of inflation, the consumer price index (CPI), which recorded a level of 3.9 per cent in July, according to research from the Office for National Statistics (ONS).

The change in expectations is in response to "global shocks" according to the IMF, which has seen a decade of low inflation and sustained growth rocked.

IMF predictions expect inflation to rise to five per cent by the end of the year, following a "surge in global commodity prices" – well ahead of the government target of two per cent.

"For over a decade the United Kingdom has had a remarkable run with stable economic growth and low inflation," explained Ajai Chopra, IMF mission chief for the United Kingdom.

"However, strains were emerging even before the economy was hit by major global shocks. Notably, inflation and inflation expectations were on the rise, the housing market was overheated, and headroom under the two fiscal rules was eroded."

The new growth forecasts from the IMF are substantially below government expectations for UK growth, with officials still expecting growth to pick up to around 2.5 per cent next year.

The government was also castigated for breaking fiscal rules, with the IMF citing current account deficit as a major cause for concern.

With the deficit was running at between 1.5 to 2.5 per cent of GDP over the course of 2004 and 2005, it rose to the four or five per cent of GDP in 2006 and 2007.

The IMF's annual inspection of the UK economy also confirmed the housing market had weakened markedly, while export demand remained subdued.