IMF cuts UK growth forecast

Can shoppers support the economy?

The International Monetary Fund (IMF) has cut its growth forecast for the UK and warned of the risk of the house price bubble bursting.

The UK economy will grow by just 1.7% this year, down from the previous estimate of 2% made in the spring report, the IMF said.

The IMF's assessment is below the prediction of Chancellor Gordon Brown, who is expecting growth of between 2% and 2.5%.

The report coincides with new research which shows that the UK is dropping down the league of countries enjoying investment from foreign firms.

The UK has dropped to seventh on the list, well down from its previous position of third, according to US consultants AT Kearney.

Housing fears

The IMF's annual progress report, the World Economic Outlook, gave the thumbs up to hopes that the US recovery may be gaining pace, but warned that it may not be enough to boost the world economy.

IMF growth projections for 2003 Eurozone: 0.5% UK: 1.7% US: 2.6% S. America: 3.6% Africa: 3.7% Mideast: 5.1% Asia: 6.4% The outlook for the wider world

The UK continues to significantly outperform the eurozone, but has fallen behind the US which is experiencing a strong recovery from its recession.

The IMF blamed a deterioration of investment, private consumption and external demand for the weaker-than-expected growth in the first half of this year.

Despite the short-term gloom, the IMF expects the UK's economic performance to improve in 2004.

This was underlined by Bank of England governor Mervyn King who said on Thursday that he expected the UK's growth to pick-up in the third quarter of this year.

Rate cut?

On Thursday, new figures revealed that retail sales grew by 0.2% in August, spurred on by holiday-related products.

"It underlines the resilience of the consumer at the present time," said Simon Rubinsohn, chief economist at stockbroker Gerrard.

Mr Rubinsohn added that the strong retail figures could also prompt the Bank of England to raise interest rates in order to deter spenders from running up too many debts.

Mr King did refer to the problem of consumers racking up too much debt in his speech, with some analysts interpreting this as an indication that the next move for UK interest rates could be up.

On Wednesday, the release of minutes from the latest rate-setting meeting of the Bank of England revealed some members thought "an increase in rates might soon become necessary".

However, the latest figures on industrial trends were disappointing, reversing last month's improvement and countering expectations of a rise in interest rates.

"Some firms had hoped the worst was behind them, but manufacturers are not out of the woods yet," said Ian McCafferty, CBI chief economic adviser.