Page last updated at 13:53 GMT, Wednesday, 9 April 2008 14:53 UK

Darling 'optimistic' on economy

Alistair Darling
The Chancellor has faced a difficult year

The Chancellor Alistair Darling has defended his economic forecast after UK expected growth was downgraded by the International Monetary Fund (IMF).

Speaking on Radio 4's Today Programme, Mr Darling said that "there were grounds for optimism" despite the "unprecedented shock to the economy."

Mr Darling said that the UK still had a "strong economy that had proved remarkably resilient" in the slowdown.

He said the IMF had downgraded the UK by less than other major economies.

We believe there is a need for more immediate action by the central banks, in particular the Bank of England in the UK, to address market funding problems
Michael Coogan, Council of Mortgage Lenders

The IMF's World Economic Forecast, released on Wednesday, said that the UK economy will slow sharply to a growth rate of just 1.6% in both 2008 and 2009.

Growth in the world economy will slow substantially, led by a much deeper and longer slowdown in the US, including a "modest recession."

The IMF said that the UK economy would be affected by a weakening housing market, the contraction of the financial sector, and the impact on UK exports of weaker growth in the US and Europe.

Better placed

But the Chancellor insisted that the UK was better placed than other countries to cope with the downturn.

We need to do everything we possibly can to help people through what is undoubtedly a difficult period
Alistair Darling

"The IMF has downrated every country's growth forecast in the light of what's been happening in the world economy. However, they have lowered their expectations in relation to us by less than other countries," he said.

Mr Darling said he was sticking by his forecast made in last month's Budget that the UK economy would grow by between 1.75% and 2.25% in 2008 and by 2.25% to 2.75% in 2009, substantially above IMF projections.

Any sharper slowdown in the UK economy would also put a big hole in the public finances, which are already expected to be 45bn in the red.

On Tuesday, the IMF warned that the losses from the credit crunch were likely to be in the order of $1 trillion (500bn), putting severe pressure on banks and other financial institutions.

The Chancellor will be flying to Washington on Thursday to meet other finance ministers at the IMF's spring meeting and seek coordinated action to deal with the global financial crisis.

"I do remain optimistic that provided we can take action, not just in this country but.. with other countries,...provided we can take the right action,.. then we can ensure that the economy stays growing as it has done for the last few years."

Help for housing

One consequence of the credit crunch has been that UK banks have found it difficult to raise funds for mortgages, and have cut back sharply on their lending to home owners

As a result, house prices are now falling across most of the UK. On Tuesday the Halifax said that its house price index fell in March by the largest amount since 1992.

The IMF says that UK house prices might be over-valued by up to 30%, based on fundamentals and historic values.

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The Bank of England's Monetary Policy Committee is widely expected to cut interest rates on Thursday from the current level of 5.25%.

But despite earlier rate cuts, mortgage rates have not fallen as banks have become more concerned about risky loans and falling house prices.

The Chancellor said he was sympathetic to the plight of home owners.

"We need to do everything we possibly can to help people through what is undoubtedly a difficult period.

"That means making sure we support the housing market but also making sure we support the wider economy, keeping people in work."

'Dither and delay'

Mr Darling announced that he was creating a new working group, chaired by former HBOS chief executive Sir James Crosby, to find ways to "re-open" the UK's ailing mortgage market.

Mr Crosby said that "our job will be to facilitate a discussion between lenders, investors and the authorities with a view to identifying market-led solutions that will work."

It will produce an interim report on the state of the mortgage market by the summer and come back with firm proposals in time for the Pre Budget report this autumn.

With the number of new mortgages falling to its lowest level for 16 years, the Council of Mortgage Lenders (CML) said the need for action was pressing.

"The shortage of funding is creating disruption in mortgage and housing markets now," said the CML's Michael Coogan.

"While the working group is developing its proposals, we therefore believe there is a need for more immediate action by the central banks, in particular the Bank of England in the UK, to address market funding problems."

The Shadow chief secretary of the Treasury, Phillip Hammond, criticised the chancellor's move.

"In the face of this urgent economic crisis, all the government can do is dither and delay and launch yet another review," he said.

"To support the housing market and help maintain consumer confidence, he should be cutting stamp duty for first time buyers, instead of increasing taxes on the low paid".


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