Darling forecast savaged by IMF’s dire predictions

The world financial watchdog forecast a much deeper and longer recession than the Chancellor just moments after he delivered his speech to a raucous House of Commons.

Alistair Darling forecast economic output to fall 3.5% this year but grow by 1.25% next year and 3.5% in 2011.

Just moments later the IMF predicted a 4.1% contraction this year followed by another decline of 0.4% in 2010.

It was a drastic downgrade from its January projection for a 2.8% decline this year and modest growth of 0.2% next year.

The City also cast doubt over the Treasury forecasts and said hopes for a V-shaped recession — a sharp downturn followed quickly by recovery — were optimistic.

A slump of 3.5% this year would be the deepest since 1945 and the prediction was far worse than the 1% decline expected by the Chancellor in the pre-Budget report in November.

But Darling merely pushed back the timing of recovery from the third quarter this year to the fourth quarter and stuck to his guns over an early return to growth. "Because of our underlying strength, the measures we are taking, domestically and internationally, I expect to see growth resume towards the end of the year," he said.

"The British economy will suffer less than Germany, less than Japan, less than Italy, and less than the euro area as a whole this year. The British economy is diverse, flexible and resilient, which is why we can be confident in recovery."

The Chancellor outlined borrowing of £175 billion this year, £173 billion next year and £140 billion the year after to make up for the collapse in tax revenues and surge in spending.

It was £178 billion more than expected in November and will send debt above £1 trillion for the first time. It forced the Treasury to issue record numbers of gilts and outline tax rises.

John Hawksworth, head of macroeconomics at PricewaterhouseCoopers, said: "We agree with the Chancellor that the economy will shrink by around 3.5% this year, but we are more cautious about the speed of the recovery next year and beyond. Public borrowing in the medium term could therefore exceed even the very high levels projected by the Treasury."

The economy did not grow in the second quarter of last year, shrank 0.6% in the third quarter and 1.6% in the fourth quarter. The Chancellor said he expected a similar contraction in the first quarter of this year.

But forecaster Capital Economics did not expect a return to growth until the last quarter of next year. Capital's chief European economist Jonathan Loynes said: "We continue to believe that the recession will persist in 2010 mainly due to weakness in the household sector."