No recovery until 2018, IMF warns

The International Monetary Fund's chief economist has warned that theglobal economy will take a decade to recover from the financial crisis as the latest snapshot of the UK economy suggested that growth in the third quarter will be at best anaemic.

Olivier Blanchard said he feared the eurozone crisis, debt problems in Japan and the US, and a slowdown in China meant that the world economy would not be in good shape until at least 2018. "It's not yet a lost decade," he said. "But it will surely take at least a decade from the beginning of the crisis for the world economy to get back to decent shape.

Blanchard made his comments on a Hungarian website Portfolio.hu ahead of the IMF meeting next week in Tokyo. Germany is expected to defend its handling of Europe's debt problems at the meeting, but Blanchard said there was more that Europe's largest economy could do to support Spain and other struggling eurozone nations. In particular, he urged Berlin to accept a rise in inflation and wages that would make it less competitive with its trading partners.

He said there was no risk of hyperinflation in Europe. Higher inflation in Germany, though, would be beneficial: a somewhat higher inflation rate in Germany should simply be seen as a necessary and desirable relative price adjustment, he said.

Blanchard's comments came as figures from Markit showed that the UK's important services sector grew in August but slipped back by September as the Olympics factor waned.

According to industry figures from Markit the services activity index dropped from 53.7 to 52.2 and employment fell, adding to gloomy surveys of the construction and manufacturing sectors earlier in the week.

Markit, which compiles a monthly index based on figures from the Chartered Institute of Purchasing and Supply, said it was now clear that the bounce back from the slump in the first half of the year was weaker than expected and could result in the UK economy growing by just 0.1% in the third quarter.

Hopes that the Queen's diamond jubilee and the £9bn spent on the Olympics would lift sales over the longer term have largely been dashed as growth slows and the outlook, though robust with a growing order book, remains subdued.

The Bank of England's monetary policy committee, which began a two-day meeting on Wednesday, is on Thursday expected to keep interest rates at 0.5% and maintain the stock of bonds in its quantitative easing programme at £375bn.

Most economists believe it is possible the lacklustre figures will persuade the MPC to add a further £50bn at its November meeting when the first estimate of the third quarter figures is available.