UK economy could take a bashing

BRITAIN'S booming economy will slow dramatically next year, the International Monetary Fund has warned. The slowdown could be worsened by a sharp decline in house prices.

The forecast of worse times ahead comes in the IMF's influential World Economic Outlook report and will be a severe blow to the Government as it limbers up for a General Election expected next year.

A leaked version of the IMF report shows growth in the British economy slipping from a supercharged 3.4% this year, in line with Chancellor Gordon Brown's Budget forecast, to just 2.5% in 2005.

This is well below the 3% to 3.5% expansion of national wealth projected in the Chancellor's March Budget.

Signs of the slowdown are already starting to emerge, with the jobs market flattening in August and new home loans slumping by 20%.

A slowdown has been on the cards ever since the Bank of England started to raise interest rates in November 2003. They have been increased five times, to 4.75%, as the Bank has sought to calm the housing and consumer credit boom. The IMF forecast suggests the strategy has put a dampener on the whole economy.

The IMF is also expected to warn that the housing market is in danger of falling sharply. It argues that house prices are out of line with fundamentals and this could lead to a 'pronounced drop in prices'.

This would contribute to the overall risks to the economy, which has been buoyed by the house price explosion.

A slowing economy would make it more difficult for the Treasury to collect the revenues it needs to fund spending on health, education and social services.

The risk must be that public sector borrowing - which reached £18.8bn in the first five months of 2004 - will spiral out of control.

Only yesterday the independent Institute of Fiscal Studies cautioned the Chancellor that he is already in danger of breaching his own fiscal rules because borrowing is expanding too fast. Fears are growing in the City that a post-election rise in taxes is on the cards.

The Washington-based IMF expects to see little improvement in the public finances in 2005. It predicts that borrowing will remain at 2.9% of national wealth, a fraction below the 3% projected for the current year.

The US economy is also forecast to cool in 2005 with output slowing from 4.3% to 3.5%. The IMF thinks European economies will continue to splutter, with Germany growing at just 1.9%, barely enough to cut high unemployment.