UK ‘to be worst hit’ as IMF slashes forecasts

The International Monetary Fund (IMF) has slashed its forecast for GDP growth in the main advanced economies in 2009, from 1.4% to just 0.5%.

The International Monetary Fund (IMF) has slashed its forecast for GDP growth in the main advanced economies in 2009, from 1.4% to just 0.5%.

In its quarterly World Economic Outlook, published last week, the IMF cut its projected year-on-year growth for America by 0.7 percentage points, compared with its July report.

However, the forecast for Britain was worst hit – its GDP expected to decline by 1.8 percentage points. The IMF expects the British economy to contract by 0.1% next year, rather than growing by 1.7%. Only the Italian and Spanish economies will fare worse, it says, each contracting by 0.2%.

Overall, the IMF expects no growth in many advanced economies until at least the middle of 2009, followed by an “exceptionally gradual” recovery, because of turmoil in the financial sector. Olivier Blanchard, the IMF’s chief economist, warned of a “downward spiral of loss of confidence and trust”, resulting in lower consumer and business confidence.

Speaking before last week’s British bank bail-out and the interest rate cuts by six central banks, Blanchard called for co-ordinated action to “stem the negative momentum on multiple fronts.” With the right policies in place, he said, the global economy would be able to “ride the storm” and recover next year.

The report is more upbeat on the outlook for inflation in the advanced economies. The combination of “rising economic slack” and stabilising commodity prices will be beneficial, it says.

Frances Hudson, global thematic strategist at Standard Life Investments, says she expects developed world inflation to peak by the end of 2008. However, she agrees with the IMF’s assessment that inflation will remain at higher levels in the developing economies.

“Food is a bigger part of the consumer basket,” says Hudson. “There have been substantial falls in metals and energy, but food prices have not come down as much. The developing world also has wage inflation.”

Despite its forecast of persistent emerging market inflation, the IMF is still upbeat on prospects for GDP growth.

The organisation revised down its projection for China, but still expects growth of 9.3% in 2009.