The International Monetary Fund, IMF, has reviewed its forecast for the United Kingdom, UK’s economic growth over the next two years. In the new forecast, the IMF has predicted that the UK would grow by 1.4 per cent in 2006 and 1.1 per cent that the UK would grow by 1.4 per cent in 2008 and 1.1 per cent in 2009, down from the 1.8 per cent for 2008 and 1.7 per cent for 2009 that it predicted in july. It said the current rate of inflation, 3.8 per cent, was higher than expected, noting that inflation was rising, even as economic activity slowed down. The implication is that the Bank of England has little room to cut rates.
The IMF growth forecast for 2009 is substantially below the official forecast of the UK government, which expects growth to pick up to around 2.5 per cent next year, and even lower than projections by independent forecasters. The slowdown is expected to put more pressure on the budget at a time when the budget is facing a record deficit.
The IMF said that the government was likely to breach its fiscal rules, with the budget deficit above 3.5 per cent of gross domestic product, GDP, for both 2008 and 2009, while the 40 per cent debt ceiling was likely to be breached from 2009. It warned. It warned that the government was in danger of losing credibility if it made a too drastic revision of the fiscal rules, as it is rumoured to be considering in the pre-budget report.
In particular, The IMF cautioned against any change to the budget ceiling of 40 per cent and suggested the government give an assurance that it would bring the debt back below that level in a short period. The institution pointed out that it could take years of fiscal adjustment, with sharp spending cuts or tax rises of up to one per cent of GDP a year up to 2013, to bring the budget back to equilibrium.
The IMF is, however, backing the recently announced government plan to reform the system of financial stability to prevent another Northern Rock from emerging. But it warned that ” clarity of Bank of England authority and ability to act” in the next credit crisis were essential if the reforms were to work effectively.
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