The International Monetary Fund (IMF) has issued a surprise downgrade to its UK economic forecasts and said there is a “case” for higher Treasury spending to tackle coronavirus second wave damage.
The world’s lender of last resort used its annual review of the UK economy to judge that gross domestic product (GDP) would plunge by 10.4% this year.
It was just a fortnight ago that the Fund’s latest World Economic Outlook had estimated a 9.8% hit.
The report blamed “second wave headwinds” for the adjustment, while also trimming its outlook for the fightback in growth during 2021 from 5.9% to 5.7%.
Its report warned that risks to its forecasts were skewed to the downside with persistent unemployment and lower productivity growth set to hold GDP 3%-6% below its pre-pandemic trend in the medium term.
It said risks would include the lack of a trade deal with the EU when the Brexit transition period ends.
The review found there was space for additional government spending to support activity as local COVID-19 restrictions are toughened and once the economy emerges from the constraints placed upon it.
It was completed a month before Chancellor Rishi Sunak is due to outline his spending plans for the year ahead.
He is already under pressure to further sweeten his support for employers and their workers amid forecasts of a surge in unemployment once the furlough scheme ends at the end of the month – replaced by the Job Support Scheme.
IMF managing director Kristalina Georgieva said: “My main message today is that continued policy support is essential to address the pandemic and to sustain and invigorate a recovery.
“We welcome that the authorities have committed to deliver it as long as necessary to boost expectations and confidence.
“The policy space exists to do this,” she added – repeating a message she gave in an exclusive interview with Sky News 12 days ago that it is no time to be raising taxes or cutting spending to account for record levels of peacetime borrowing.
She told reporters that fixing the public finances could not be ignored but should only happen “once the private sector has durably picked up steam.”
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