The International Monetary Fund yesterday cut its forecasts for the next two years and warned it wouldn’t “take much of a shock” for growth to become negative.
It now predicts that the economy will grow by 1.4 per cent in 2008 and 1.1 per cent in 2009 – well below the 1.75 per cent it forecast for both years in May.
“We do not have a negative number for our growth forecast in coming quarters, but it doesn’t take much of a shock to see it turn negative,” said Ajai Chopra, deputy director for the UK at the IMF.
But a gloomy outlook should not force the Bank of England to cut rates, the IMF said, especially as inflation continues to soar.
“Given the outlook for inflation and the stance of fiscal policy, directors saw little scope for monetary easing at present,” it said.
It predicted that inflation would continue to remain significantly higher than the Bank’s two per cent target for an “extended period”, but said there was little evidence of second-round effects as wage price pressures remained in check.
“Second quarter growth was weak, forward looking indicators are gloomy, sterling money market spreads remain elevated, unemployment has edged up, and house prices are falling rapidly,” the report said.
Meanwhile, British consumer confidence plummeted to a record low in July on rising living costs and fears of a recession.
“Talk of the increasing chances of a recession, more weakening in the housing market and the continuing rise of food and energy costs will have further dented confidence as will reports of job losses,” said Fionnuala Earley, Nationwide’s chief economist.
The survey also showed that consumers are not expecting the climate to improve over the next six months, with the expectations index down 10 points to 55. The index measuring the public’s perception of the economy fell by 10 points to 47 while the spending index went from 54 to 61.