The head of the International Monetary Fund (IMF) delivered a bleak warning to Britain on Sunday as he described the level of public debt as “disturbing”, before recommending that it be increased to finance a further fiscal stimulus.

Dominique Strauss-Kahn said that the outlook for the global economy was worsening: “I'm especially concerned by the fact that our forecast, already very dark... will be even darker if not enough fiscal stimulus is implemented.”

Speaking to BBC Radio, Mr Strauss-Kahn said that the IMF, which last month reduced its forecast for global economic growth in 2009 from 3 per cent to 2.2 per cent, gave warning that it may need to be lowered again in January because governments around the world have failed to inject enough money into their economies.

He praised the British Government for its recent debt-funded £20 billion stimulus package, which is equivalent to 1.4 per cent of the UK's gross domestic product, but said that a further stimulus was needed “to kick-start the British economy”.

Mr Strauss-Kahn called for a global stimulus package equivalent to about 2 per cent of the world's collective GDP, or $1,200 billion, implying that Britain needs an additional injection of close to £10 billion if it is to make any headway with stabilising the economy.

Although Mr Strauss-Kahn has traditionally opposed large government deficits, he said that the economic crisis was so bad that an increase in borrowing, even in debt-laden Britain, represented a “necessary evil to stimulate economic growth”.

Mr Strauss-Kahn acknowledged the risk of “social unrest” in some parts of the world as a result of the recession but said that was “only part of the problem... The problem is that the whole society is going to suffer.”

Investors were nonetheless offered a glimmer of hope yesterday as Lorenzo Bini Smaghi, a member of the European Central Bank's executive board, said that “measures adopted by governments and central banks are starting to produce their effects”, in an interview with Il Messagero newspaper in Rome.

Mr Bini Smaghi said this meant that the ECB was unlikely to cut its interest rate to virtually zero, as the US Federal Reserve did this month when it reduced its key overnight lending rate from 1 per cent to between zero and 0.25 per cent in an attempt to boost the economy. The ECB's key interest rate is 2.5 per cent.

“The United States' situation is very different from Europe's. We must not forget that the current crisis was caused by a period of interest rates taken to a very low level for too long,” he said.

However, the positive note struck by Mr Bini Smaghi's suggestion that Europe may be starting to turn a corner was not echoed elsewhere yesterday.

KPMG issued a report which said that investors believed that the average British company's results over the next year would come in 30 per cent below the present consensus analyst estimate. Worst hit would be the oil equipment, services and distribution industry, where the average company is expected to report profits 61 per cent below the consensus forecast, according to KPMG's analysis of 350 of Britain's biggest companies.

David Simpson, corporate finance partner at KPMG, said: “Our data illustrates the severe correction to earnings estimates that investors have priced in, highlighting there is real pain to come in terms of corporate profitability over the next 12 to 18 months.

“All eyes will, however, be on cash- generation rather than earnings in the current climate; companies with debt maturing in the next 18 months are especially vulnerable.”

The average British technology and hardware equipment company is expected to miss its profit forecast by 55 per cent, followed by 54 per cent of media groups and 54 per cent of mining companies, according to KPMG.

The three sectors least likely to see a series of earnings downgrades and which KPMG believes could even see some upgrades are household goods, household insurance and tobacco.

KPMG arrived at its conclusions by analysing the share prices and profit forecasts of the companies for next year and comparing them to those for each of the last ten years.

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