The Organisation for Economic Co-operation and Development (OECD) has again cut its growth forecast for the UK economy. It now says the UK economy will contract by 0.7 per cent in 2012.
Just four months ago, in May, it said the UK economy would grow by 0.5 per cent. The only European economy predicted to fare worst by the OECD is Italy which is expected to contract by 0.8 per cent this year.
Now it says that the UK economy will not grow this year as the euro debt crisis continues to have an impact on UK exports. In a veiled criticism of the government's deficit reduction programme, the OECD said that the cuts were acting "as a drag" on the economy and called for more stimulus through quantitative easing (QE).
Labour has siezed on the figures as evidence that the government's economic policies are not working but ministers responded by saying that there is "no quick fix" for the economy.
The Prime Minister, David Cameron said: "If there was a button you could push in Whitehall which just said “right, growth comes” I would have pushed it long ago."
He outlined what he believes should be the government's role in helping the economic recovery: "What the Government can do is set the conditions for growth, provide that background of low interest rates and low tax rates," he said.
Meanwhile, in a speech in Scotland, the Chancellor, George Osborne said: "Our economy is healing – jobs are being created, manufacturing and exports have grown as a share of our economy, our trade with the emerging world is soaring, inflation is down, much of the necessary deleveraging in our banking system has been achieved, and the world is once again investing in Britain.
"But the scale of the challenge is so great there are no quick fixes or easy routes to recovery. Nobody is offering a credible or convincing alternative economic strategy. There is no easy path to recovery and prosperity. We in Britain have to confront our problems head on, be honest about the scale of the challenge, and be consistent in our determination to succeed."
The OECD said that there was increased uncertainty in relation to its predictions for the UK economy because of the extra bank holiday due to the Diamond Jubilee and The impact of the Olympics.
The report said: "The impact of the Olympics may also not be fully accounted for in these forecasts."
They have also cut the growth forecast for many other OECD countries including Germany, which it now expects to grow by 0.8 per cent rather than 1.2 per cent.
Growth forecasts for most countries within the eurozone were cut on the day that it was confirmed that the eurozone economy contracted by 0.2 per cent in the second quarter.
Howard Archer, Chief UK & European Economist at IHS Global Insight said: "The Eurozone continues to struggle against tight fiscal policy in many countries, high and rising unemployment, muted global economic activity and ongoing serious sovereign debt tensions that are weighing down on confidence and limit investment.
"Consequently, we expect Eurozone GDP to contract by 0.5% overall in 2012. There are mounting downside risks to this forecast."
Rachel Reeves, Labour's shadow chief secretary to the treasury, said: "These very concerning forecasts show just how badly the government's economic policies have failed."
"David Cameron and George Osborne need to stop clinging on to their failed economic plan and change course now. Without a serious plan for jobs and growth we won’t get the deficit down."
The OECD said that the euro debt crisis poses the biggest risk to global growth. Hopes are pinned on the successful outcome of a bond-buying programme by the European Central Bank to help avoid the ever-increasing likelihood of a recession in the eurozone.
Chief OECD Economist Pier Carlo Padoan, said: “Our forecast shows that the economic outlook has weakened significantly since last spring. The slowdown will persist if leaders fail to address the main cause of this deterioration, which is the continuing crisis in the euro area.”
The OECD predicts that Europe’s three largest economies, Germany, France and Italy will shrink at an annualised rate of one per cent in the third quarter and 0.7 per cent in the fourth.
Chris Williamson, chief economist at Markit, said: "The downgrade to the outlook is not surprising, given the deterioration in the eurozone crisis and the extent to which we have seen business confidence hit as a result. Unless the eurozone crisis is resolved soon, even these downgraded forecasts could prove overly optimistic."
Outside of Europe, the OECD also revised down growth forecasts for both the United States and Canada, but only marginally. The US is expected to grow at 2.3 per cent this year rather than 2.4 per cent, whilst Canada will grow at 1.9 per cent rather than 2.2 per cent. Japan’s growth estimate has been revised up from 2.0 to 2.2 per cent.