9 Sep 2011

British economy faces ‘heightened risk’ – IMF chief

The head of the International Monetary Fund warns that Britain must be ready to respond to the sluggish global recovery.

In a speech in London, Christine Lagarde gave her support to the government’s programme of cuts, but said economic policy had to “remain nimble” in the face of weak growth.

Chancellor George Osborne said Ms Lagarde had made it clear that Britain’s “strong fiscal consolidation” was essential to deal with debt. But Shadow Chancellor Ed Balls said she was not offering Ms Osborne the “ringing endorsement” he was expecting.

Growth forecast

Yesterday, the OECD think tank downgraded its forecast for the British economy, predicting that it would grow by just 0.1 per cent in the third quarter of this year.

Ms Lagarde said: “The policy stance remains appropriate, but this heightened risk means a heightened readiness to respond – particularly if it looks like the economy is headed for a prolonged period of weak growth and high unemployment.”

While spending cuts and tax increases were necessary, acting too quickly would be dangerous. “For the advanced economies, there is no question that fiscal sustainability must be restored through credible consolidation plans. But we also know that consolidating too quickly will hurt the recovery and worsen job prospects.”

Read more from Economics Editor Faisal Islam: IMF's changing position on Britain's economic policy

Labour’s warning

Mr Osborne said the government would continue with its cuts programme. “We will stick to the deficit reduction plan we have set out. It is the rock of stability on which our economy is built.”

But Labour accused the government of cutting too fast. Mr Balls said: “Christine Lagarde is right to repeat her warning that cutting too quickly will hurt the recovery and jobs and that there is scope for reducing deficits more steadily to support economic growth.

“This is clearly a message aimed squarely at America, the eurozone and Britain too. As I said yesterday, it comes as no surprise that, despite those clear warnings, the IMF has diplomatically shied away from contradicting our chancellor in public – at least for now.

“In my experience, the IMF’s message to Britain in private and at today’s G7 meeting will be rather more blunt.”

Read more: Euro tumbles as ECB chief economist Stark quits