The International Monetary Fund lowers its growth forecast for the UK and says Chancellor George Osborne should consider changing his austerity policies.
The IMF has cut its forecast from 1 per cent to 0.7 per cent for 2013, slighly above the Office for Budget Reponsibility’s 0.6 per cent forecast in last month’s budget.
The organisation also expects growth to be lower than previously expected in 2014 – down from 1.9 per cent to 1.5 per cent.
Its report said: “In the United Kingdom, the recovery is progressing slowly, notably in the context of weak external demand and ongoing fiscal consolidation.”
It said rebalancing from the public to private sector was “being held back by deleveraging, tight credit conditions and economic uncertainty”.
The IMF added that hopes for an export-led recovery were also being hit as “declining productivity growth and high unit labour costs are holding back much needed external rebalancing”.
It said Mr Osborne should consider a more flexible approach in his efforts to cut the budget deficit through spending cuts and tax rises.
“Greater near-term flexibility in the path of fiscal adjustment should be considered in the light of lacklustre private demand.”
Shadow chancellor Ed Balls said the IMF was right to “insist that a change of economic policy is considered right now”.
He added: “Our economy has flatlined for two and a half years, real wages are falling month by month and the result is £245bn more borrowing than planned to pay for this economic failure. How much more damage needs to be done before the chancellor finally acts?”
Looking at other leading economies, the IMF said “the road to recovery in the advanced economies will remain bumpy”.
It forecast that the eurozone economy would contract by 0.3 per cent this year, with Germany growing by 0.6 per cent and France shrinking by 0.1 per cent.
It said it expected the American economy to grow by 1.9 per cent. But chief economist Olivier Blanchard said growth in the US would be up to 2 per cent higher if it was not cutting spending and raising taxes.
Developing nations are expected to show the strongest growth over the next two years, with China expanding by 8 per cent in 2013 and India by 5.7 per cent.