Global economy put on red alert

Julian Harris
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THE GLOBAL economy has hit a “dangerous new phase”, the International Monetary Fund (IMF) warned yesterday, as it slashed growth forecasts for nearly every corner of the world.

The UK’s economy will grow by just 1.1 per cent this year, the IMF expects, knocking 0.4 per cent off its projections from June.

And stock market falls this quarter point to roughly a one in six chance of a British double dip, the IMF said.
France faces a similar likelihood of another downturn, the group’s World Economic Outlook said, while the US is looking at a more worrying 38 per cent chance of a double-dip.

Despite the global nature of the economic slowdown, the news piles more pressure on chancellor George Osborne’s deficit reduction plans, which largely depend on economic growth. The latest data on the UK government finances is released today.

The Office for Budget Responsibility expected growth of 1.7 per cent for 2011, in its most recent forecast in March. And as recently as last November, the government’s fiscal watchdog optimistically predicted growth of 2.1 per cent this year – around double the current outlook.

Central government current spending has slowed in recent months, yet remained £6.6bn higher in April to July compared to the same time last year. Shadow chancellor Ed Balls yesterday repeated his call for the government to delay its deficit reduction.

The IMF’s chief economist Olivier Blanchard stayed on the fence: “Fiscal consolidation cannot be so fast that it kills growth, nor so slow that it kills recovery.”

The government could bring forward £5bn worth of spending on infrastructure, BBC television said last night. The Treasury denied the claim, yet senior Liberal Democrats are believed to be keen. Business secretary Vince Cable has spoken of “flexibility built into the existing fiscal plans”.

The IMF’s Blanchard also singled out the ongoing Eurozone crisis.

“There is a wide perception that policymakers are one step behind markets,” Blanchard said. “Europe must get its act together.” Eurozone growth for this year was also slashed to 1.6 per cent in yesterday’s report.

Next year, the single currency area will progress at an even more sluggish rate of 1.1 per cent, the IMF expects, knocking 0.6 percentage points off its June forecast.

Even harsher estimates were dropped on the US, with a whole percentage point taken off its growth outlook for this year.

The world’s largest economy is expected to expand by just 1.5 per cent this year and 1.8 per cent next year.

Across the pond, new construction of US homes fell more than expected in August. Housing starts dropped five per cent, the most since April, to a seasonally adjusted annual rate of 571,000 units, data revealed yesterday.