The International Monetary Fund (IMF) has cut its growth forecast for the UK economy for 2012.
It says the UK economy will shrink by 0.4 per cent rather than grow by 0.2 per cent as it predicted just three months ago in July.
It says the UK economy will grow by 1.1 per cent in 2013, down from 1.4 per cent. Only Spain and Italy in Europe were given a weaker growth prediction than the UK.
The IMF said that globally the economic recovery is weakening as government’s have failed to restore confidence in consumers, businesses and the financial markets.
The IMF said that the risk of further deterioration in the global economic outlook was “considerable”.
It downgraded its prediction for overall global growth in 2013 from 3.9 per cent to 3.6 per cent. This year it says the global economy will grow by 3.3 per cent, down from 3.5 per cent.
The IMF said growth was being curtailed by “public spending cutbacks and the still-weak financial system weighing on prospects.”
The UK Treasury defended itself from the downgrade by saying that the IMF highlighted that it is taking the right actions to defend the UK economy against slowing growth because it had "repeated its advice that the first line of defence against slowing growth should be to allow the automatic stabilisers to operate, monetary policy easing and measures to ease the flow of credit - all of which the UK is doing".
Olivier Blanchard, the IMF's chief economist, said: “Low growth and uncertainty in advanced economies are affecting emerging market and developing economies through both trade and financial channels, adding to homegrown weaknesses.”
The IMF said that much of the global recovery will depend on the US economy and how eurozone policy makers act to resolve the euro debt crisis.
It said: “Overall, economic output is expected to remain sluggish in advanced economies but still relatively solid in many emerging markets and developing economies".
The IMF highlighted the vital role that the European Stability Mechanism (ESM) has to play. This is the eurozone’s new permanent fund to use to bail out problem banks and economies. The IMF also called for greater integration of tax and spending policies and banking operations in the eurozone is required.
The ESM will have a lending facility of €500 billion by 2014 and it will be able to lend directly to governments and will be able to buy up sovereign debt which will mean there is an option to lower the borrowing costs of countries such as Spain and Italy.
The report said: "The ESM must intervene in banking systems and provide support to sovereigns, while national leaders must work toward true economic and monetary union."
Meanwhile, in the US the IMF called for the two parties to find a deal that avoided the imposition of automatic spending cuts and tax increases. Although this is unlikely to happen before the US Presidential election in November, it is vital that it happens soon afterwards to avoid the US falling back into recession.