The International Monetary Fund has downgraded its growth forecasts for the UK and warned the United States and Europe are at risk of plunging into a double-dip recession.
According to the IMF, the global economy is entering a "dangerous new phase" with world growth projected at four per cent in both 2011 and 2012, down from over five percent in 2010.
"The global economy is in a dangerous new phase. Global activity has weakened and become more uneven, confidence has fallen sharply recently, and downside risks are growing," the IMF said in a statement on Tuesday.
It also warned in its World Economic Outlook report there was an increased risk of a new recession from the third quarter of 2011 for the United States, and to a lesser extent for France and the UK.
According to the report the UK will see its GDP grow by just 1.1 per cent in 2011 compared to the 1.7 per cent it predicted in April. And it expects the growth of only 1.6 per cent in 2012 compared to the 2.3 per cent previously forecast.
The IMF has said Britain may have to reassess its defect reduction plans in the event of any further downturn and warned there was a one-in-six chance of a second recession.
Shadow chancellor Ed Balls said that George Osborne should heed the IMF's warning and look at a 'Plan B' for the economy.
“The IMF is right to warn that we need credible medium-term plans to get deficits down, but that doing it too quickly puts jobs and economic recovery at risk," he said.
"That’s exactly what we have seen here in Britain where spending cuts and tax rises that go too far and too fast have crushed confidence."
He added: "Far from being a safe haven, as George Osborne complacently claims, only Japan in the G7 has grown more slowly than the UK in the last 12 months."
Later on Tuesday the Cabinet Office minister Oliver Letwin said the government remained "absolutely resolutely determined to deal with our deficit problem".
He was speaking at a fringe event inside the Liberal Democrat conference in Birmingham, also attended by the Chief Secretary to the Treasury, Danny Alexander. He suggested US and eurozone leaders needed to properly address the crisis.
"There are doubts about the ability of politicians to deal with the problems they are facing," he said.
This was a view shared by Brendan Barber, the general secretary of the TUC, who told a fringe meeting at the conference that the right-wing of the Republican party in the US was making matters worse.
"There is almost paralysis in the United States. Obama is struggling to get a package to deal with the crisis because of obstacles from Tea party," he said.
The IMF has also cut its growth forecasts for the United States by 0.6 per cent for 2011 and 0.7 per cent for 2012, to 1.6 per cent and 1.9 per cent respectively.
Danny Alexander was asked at what point would he might consider a plan B. He replied: "We always said that the recovery would be choppy. Next year the IMF forecast the UK growing more slowly than expected, but still growing more strongly than France and the Eurozone."
Foreign Secretary William Hague said that while there were concerns about the global economy Britain would not change course.
"The important thing is we have put ourselves in a position to restore health to our national finances through the decisions the chancellor has taken," he said.
He added: "We've done that when not every other country has had the determination to do that."
The report concluded one-off shocks including the earthquake and tsunami in Japan and social unrest in some oil-producing countries such as Libya and major financial turbulence in the euro area had also contributed to stifled growth.
On Tuesday as ratings agency Standard and Poor's downgraded Italy's credit rating to A from A+ due to weak growth, Cabinet minister Oliver Letwin insisted that Italy and other Eurozone countries were now starting to adopt policies similar to the coalition government in Britain.
"The is a very considerable difference between the way the markets are treating Italy and the way they are treating Britain," he said. "I really believe what is needed in part in many countries is a fiscal consolidation that parallels ours. A year ago they were not, now they are beginning to do so."