IMF Slashes European Growth ProspectsSean O'Grady
The world faces its worst recession since the Second World War, with the UK on course to be bottom of the international growth league among the major advanced economies, according to the latest forecasts from the International Monetary Fund.
The British economy will shrink by 2.8 per cent this year, says the IMF, with dire implications for jobs, house prices and the public finances. As recently as November, the IMF forecast a relatively mild downturn of 1.3 per cent in the UK.
In its latest World Economic Outlook, the IMF now sees economic activity contracting by around 1.5 per cent in the US, 2 per cent in the eurozone, and 2.5 per cent in Japan. Two of the brightest stars in the economic firmament, China and India, have seen their growth forecasts slashed, to 6.75 per cent and 5 per cent respectively. The global economy as a whole is perilously near to shrinking, with a mere 0.5 per cent growth predicted – the lowest since the 1940s. "We now expect the global economy to come to a virtual halt," said Olivier Blanchard, the IMF's chief economist.
The International Labour Organisation said global unemployment and poverty are set for a "dramatic increase" in the coming year. The UN agency added that in a worst-case scenario, recorded unemployment could rise by more than 50 million from the 2007 level to a total of 230 million, or 7.1 per cent of the world's labour force, by the end of 2009.
The scale of economic decline forecast for Britain by the IMF suggests that the jobless figure would exceed three million within a year, surpassing peaks last experienced in the 1980s.
Yesterday, the Institute for Fiscal Studies said Britain faces a £20bn-a-year "double whammy" of tax rises and spending cuts to restore public finances to order – it will take until 2029 for government debt to recede to levels seen before the credit crunch. It warned taxes would rise and spending would be cut whoever wins the next election.
As Gordon Brown spoke of the "deep world recession", the reports added to jitters among Labour MPs. They are starting to express concern that the Government's blizzard of initiatives are cutting little ice with the public and are urging Mr Brown to find "new language" to explain his measures.
One senior Brown ally told us: "He needs to use simpler language to explain the measures we are taking. He keeps repeating phrases like 'global recession', but that is too much jargon. He needs to say, 'We're facing problems. The whole world is facing problems. But we're helping to sort it out.' The average man is not going to understand our message if it contains too much economics."
Opposition parties seized on the double blow to Mr Brown's efforts to reassure his MPs. George Osborne, the shadow Chancellor, said: "Gordon Brown cannot answer the simplest question of all: if Britain is well prepared as he claims, why are we facing the worst recession in the world?"
Vince Cable, the Liberal Democrats' Treasury spokesman, claimed the IMF report exposed Mr Brown's "lie" that Britain is well placed to deal with the recession, because it faces a bigger slowdown than Europe and the US. "The Prime Minister likes to pretend Britain is simply the victim of a global crisis, but many of the UK's problems are clearly home grown," he said.
Alistair Darling, the Chancellor, warned of a grim start to 2009, forecasting "a lot of downsides" in the period ahead. In an interview with the New Statesman published today he insisted: "We will get through it."
Stephen Timms, the Treasury minister, conceded the Government would need to revise forecasts for the public finances this spring. "Things are changing and we will need to update them when we get to the Budget," he said.
Today, Mr Brown will try to paint an upbeat picture of a post-recession Britain as Lord Carter, the Communications minister, outlines plans to make high-speed broadband available to all. In a speech in London, the Prime Minister will say the digital economy is currently worth £50bn a year in Britain alone and will grow rapidly in the future. "Even at this difficult time for the economy, we will not turn our backs on the future, we will build bridges to the future. From the digital economy to fuel-efficient cars, from pharmaceuticals to renewables, Britain must invest in the industries of the future even as we fight our way out of what the IMF has described as a 'global economic slump'."
The IMF's downbeat view found ready agreement among the elite financiers and economic thinkers gathered at the World Economic Forum in Davos, Switzerland. George Soros, who "broke the Bank of England" in the ERM crisis of 1992, said the size of the problem facing the world's financial system is "significantly larger than in the 1930s".
Nouriel Roubini, professor of economics at New York University, added: "There is nowhere to hide... We have for the first time in decades a global synchronised recession. This is not your traditional minor recession."
The IMF says tax cuts and public spending and borrowing boosts all over the world will be useless unless the financial system is rebooted.
Its managing director, Dominique Strauss-Kahn, warned: "If there's not a restructuring of the banking system, all the money you can put into [monetary and fiscal] stimulus will just go into a black hole."
The good news
The good news for the economy yesterday came from supermarket chain Asda, which confirmed it would be creating 7,000 new jobs this year with many of the positions aimed at the long-term unemployed. BSkyB also announced it would be hiring 1,000 staff after increasing its revenue in the second half of last year.