By David Milliken
LONDON, Oct 8 (Reuters) - The International Monetary Fund cut its economic forecasts for Britain on Monday, and said more Bank of England stimulus -- and possibly higher public spending or tax cuts -- may be needed if the outlook darkens.
The IMF forecast Britain's economy would shrink 0.4 percent this year, before growing by a tepid 1.1 percent in 2013, down sharply from its July forecasts of 0.2 percent growth in 2012 and 1.4 percent growth the year after.
The IMF said the downgrade was part of a global slowdown - and that Britain's economy would probably outpace the euro zone's next year - but the figures are still likely to be awkward reading for finance minister George Osborne.
Britain's economy entered recession late last year, and the IMF said it faced extra headwinds from government austerity and private-sector indebtedness.
Many economists already believe Osborne will struggle to meet his goals of eliminating the structural budget deficit within five years, and putting net debt as a share of GDP on a downward path by 2015.
Monday's IMF World Economic Outlook raised the possibility that Osborne will have to deviate further from his deficit reduction plan if there is a further sharp fall in growth.
"Economies with limited fiscal vulnerability should stand ready to implement fiscal contingency measures if large downside risks materialise," it said.
The IMF did not state explicitly whether Britain's economy fell into this category, although in May - when it saw 2.0 percent growth for 2013 - it said the country might need to change its fiscal policy if growth came in much below forecast.
But Osborne rejected any change in a speech earlier on Monday at his Conservative Party's annual conference
"Our critics would gamble everything ... on the dubious idea that a few billion more of spending would dramatically improve the fortunes of the trillion-and-a-half pound British economy," he told fellow party members, vowing more welfare cuts.
The IMF also said the BoE may have to further expand its quantitative easing asset purchases, which are scheduled to finish later this month when a 375 billion pound target is reached.
"Further monetary easing through unconventional measures may be necessary, depending on the effects of the easing measures implemented recently," the IMF said.
As well as asset purchases, the BoE has also launched a scheme to offer banks cheap finance if they increase lending.
(Reporting by David Milliken; editing by Ron Askew)
Keywords: IMF BRITAIN/FORECASTS