July 16, 2012 / 4:08 PM / 5 years ago

IMF slashes UK growth outlook, sees bigger budget gap

LONDON (Reuters) - Britain's growth prospects for the next two years have worsened more than those of any other big advanced economy over the past three months, the International Monetary Fund said on Monday.

The sharp downgrade chimes with other economists' darkening assessments, and the IMF said it was too soon to say if a recent flurry of official measures to stimulate growth would be enough, or if the government will have to ease back further on its fiscal austerity plans.

In a quarterly update to its World Economic Outlook, the IMF cut its British growth forecasts for 2012 and 2013 by 0.6 percentage points each, to just 0.2 percent and 1.4 percent respectively -- well below what Britain's official forecaster, the Office for Budget Responsibility, predicted in March.

By contrast, the IMF's 2012 growth forecast for advanced economies as a whole is unchanged at 1.4 percent and for 2013 it has been cut by just 0.2 percent to 1.9 percent.

Britain's economy entered its second recession in four years around the turn of the year as it struggles to recover from the effects of the financial crisis, and the Conservative-Liberal Democrat coalition's political commitment to deficit reduction limits its options to boost growth.

Earlier this month the Bank of England said it would pump an extra 50 billion pounds ($78 billion) of newly-created money into the economy, its third round of monetary stimulus and taking the total to 375 billion pounds.

On Friday, the BoE and Britain's finance ministry said it would make around 80 billion pounds of cheap financing available to help banks sustain lending to households and businesses, while on Monday the government detailed 9.4 billion pounds of long-term rail infrastructure spending.

EURO CRISIS

The IMF said the euro zone debt crisis was largely to blame for the slowdown in growth in economies outside the bloc, and that the impact was disproportionately felt by the countries closest to it -- though it did not discuss Britain specifically.

Nonetheless, this matches the view of the BoE and Britain's coalition government, which has banked on overseas demand and business investment to offset the drag on growth from its fiscal austerity program.

"Because the euro area is the UK's largest trading partner we are now feeling the effect across our economy. But ... we are not powerless to act," a finance ministry spokesman said in response to the IMF forecast downgrade.

The IMF said slower growth would limit the pace at which the government could reduce its budget deficit this year and next, predicting the gap would total 7.1 percent of GDP next year, rather than the 6.6 percent it forecast three months ago.

At a news conference to present the economic outlook, a senior IMF official, Thomas Helbling, said it was too early to tell if the government would need to change tack on austerity -- something the IMF has said may be needed if growth disappoints.

In May, the IMF said that "if growth does not build momentum and is significantly below forecasts even after substantial additional monetary stimulus and further credit easing ... fiscal adjustment would need to be reconsidered."

Temporary tax cuts and more infrastructure spending were the measures it suggested then to help the economy out of a slump.

Helbling said the IMF wanted to see if the 80 billion pound 'funding for lending' program was successful in easing credit conditions before urging broader changes.

But the opposition Labour Party finance spokesman Ed Balls -- who has called for a temporary cut in sales tax -- said change was needed now.

"There can no longer be any excuses for delay. We need ... urgent action now to boost the British economy," he said.

Reporting by David Milliken, additional reporting by Matt Falloon; editing by Stephen Nisbet

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