Jonathan Jones

IMF: Anatomy of a downgrade

IMF: Anatomy of a downgrade
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Growth forecast downgrades should come as no surprise these days, but when they come from the IMF they naturally command a fair bit of attention. In fact, the IMF's downgrades for annual GDP change — to -0.4 per cent in 2012 (from +0.2) and +1.1 per cent in 2013 (from +1.4) — simply bring them into line with the consensus. The below graph shows how the average of independent forecasts for 2012 growth has changed over the last few  months:

Given that the ONS shows the economy having contracted by 0.7 per cent in the first half of this year, the IMF's forecast of a 0.4 per cent contraction for the whole of 2012 implies slight growth of about 0.2 per cent in the second half.

And, as always, growth downgrades have a nasty knock-on effect for George Osborne's deficit plans. Whereas the IMF had predicted in April that borrowing would be down to 6.6 per cent of GDP in 2013, it now predicts it'll be 7.3 per cent. And whereas in April it forecast that the debt-to-GDP ratio would begin to fall (slightly) in 2015, it now doesn't have it falling until a year later. That's further evidence that Osborne may well have to ditch his supplementary fiscal target — to see that ratio falling in 2015-16 — in his Autumn statement.

A couple of weeks ago, Mervyn King told Channel 4 that it would be ‘acceptable’ to miss this that target ‘If it's because the world economy has grown slowly’. And the new IMF report does provide such cover, with similar growth forecast downgrades for advanced economies like the Eurozone, Japan and Canada and for emerging ones like China, India and Brazil.