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Tuesday, 24 April, 2001, 10:30 GMT 11:30 UK
Q&A: Will the UK escape a recession?

With conflicting reports about the prospects for the UK economy BBC News Online examines how important the leaked IMF report is and looks at whether the UK will escape the slowdown hitting the US.

What is predicted for the UK economy?

A new leaked report by the International Monetary Fund, which considers the state of the world economy, says that the UK will escape the worst of the world economic slowdown.

It predicts that UK growth will only slow this year from 2.8% to 2.6%, far less than the slowdown in many other major countries.

That is in line with government forecasts made at the time of the Budget, for a growth rate of 2.25% to 2.75%.

However, it should be noted that growth in the UK was already predicted to slow down this year, after achieving a growth rate of 3% last year.

Why has the IMF report come out now?

The IMF report is part of the World Economic Forecast that it is normally released just before IMF and World Bank hold their six-monthly meeting in Washington - due this weekend.

At that meeting, the US is expected to press the European Central Bank to cut interest rates, pressure which - so far - it has been resisting.

So the leaked report - which predicts a sharp slowdown in Europe - may be part of the campaign to pressure the ECB into a rate cut.

It also, of course, is not unhelpful to the UK government on the eve of a General Election expected to be called in the next few weeks.

How credible is the forecast?

International organisations, like the IMF and the OECD, have been no more reliable than other forecasters in predicting the global slowdown.

They often rely mostly on data supplied by member governments - and most have had to radically re-adjust their predictions over the last six months.

Forecasting when an economy is slowing down is extremely difficult.

In 1998, after the Asian economic crisis, the UK economy was predicted to go into recession, but after one quarter of near-zero growth, it recovered sharply.

Although most economic forecasts are broadly in line with government and IMF predictions, there is an unusually wide range of disagreement.

The Item club forecast, for example, which uses the Treasury's own economic model, suggests that UK economic growth could fall below 1%.

What can be done to avoid a recession?

With inflation very low, most economists believe that the Bank of England has ample scope to cut interest rates further - perhaps by as much as 1% by the summer to 4.5%.

And the tax cuts introduced by the government will also stimulate domestic demand.

So far consumer and business confidence is holding up relatively well in the UK, with low unemployment and strong wage growth.

However, many of the key decisions will be taken elsewhere - notably in Frankfurt, where the ECB has yet to decide whether to cut European interest rates.

What could go wrong?

The UK, especially its manufacturing sector, is still vulnerable to the economic slowdown in its main export markets.

UK trade with the USA has already been affected by the sharp drop in US economic growth.

With 60% of UK trade with other EU countries, a sharp slowdown in Europe could have major repercussions on jobs and profits in the manufacturing sector.

But manufacturing makes up only one-quarter of the economy.

A more prolonged slowdown, however, could make it difficult for the UK government to continue increasing public spending in future years.

Links to more Business stories are at the foot of the page.


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