UK economy will fall more than any major country in the coming year – IMF

WASHINGTON – The International Monetary Fund has slashed its growth forecast for the UK by more than any other major country in the world, as it warned that the UK is heading into recession.

The Washington-based Fund used its World Economic Outlook to warn that the UK will contract next year by 0.1pc. Although other institutions, including the Organisation for Economic Co-operation and Development, have also warned that the UK is facing a recession, none has predicted a full year of contraction.

Its chief economist, Olivier Blanchard, also indicated that both central banks and governments may still have to do significantly more to bring the financial crisis to an end. Despite the emergency half percentage point co-ordinated interest rate cuts from the Bank of England and others, he said: "more may be needed. If so, we hope that it is done."

He added: "At this stage, I think there is still scepticism in the markets as to whether the measures taken will be sufficient. I think, again, here, as more measures are taken and people just understand that they will eventually work, then they will realize that these were the first set of policies of a larger set which is coming."

The IMF used its report to warn that most major developing countries are now in or close to recession, and predicted that the world economy would come within a whisker of what it classifies as a global recession, with growth of just 3pc.

The UK projection indicates a recession almost comparable in severity to that in the early 1990s. The IMF also warned that unemployment was likely to rise sharply to around 6pc next year. The Fund also cut its growth forecast for this year from 1.8pc to just 1pc. However, it is the growth forecast next year which will cause most consternation. It cut its projection by a full 1.9 percentage points to -0.1pc.

If Alistair Darling follows suit in the forthcoming Pre-Budget Report he will have presided over the biggest ever cut in an official UK economic growth forecast, since Chancellors started putting together annual projections in the 1970s.

Mr Blanchard said that bail-outs such as the one unveiled by the Treasury could conceivably protect taxpayers’ interests by ultimately generating a profit.

He said: "We have to realise that this programme is not designed to increase government debt by enormous amounts but implies a very large outlay at the beginning with a reasonable hope that much of it will be reimbursed or even better."

The IMF report said that the US was facing recession, but that it would grow slightly faster than the UK next year at 0.1pc – some 0.7pc lower than it originally forecast. Meanwhile, advanced economies as a whole will grow by 0.5pc next year, it added.

Mr Blanchard said he was confident that provided the drastic measures being taken by policymakers were successful the world could avoid a re- run of the Great Depression. However, he said that, even so, the world faced a painful downturn, before recovering late in 2009, albeit at a slower rate than in previous recoveries.

The IMF said advanced economies were marked to grow 1.5pc this year and 0.5pc in 2009. Only two other major economies were to contract, alongside the UK, with both Italy and Spain shrinking in 2009, the report said. The Telegraph (UK)