9 Sep 2011

Guarded message from the IMF madame

Christine Lagarde is quite some diplomat.

So Madame Lagarde has not quite been saying what Ed Balls has been saying she has been saying. But nor is she giving the ringing endorsement received from this organisation as recently as June.

The reality behind this is that the US has changed its position. A few months ago it was willing to accept that other countries, Britain at the fore, were pushing a strategy of global austerity. This has now dissipated. The White House and the US Treasury now wants some cover for a slower austerity strategy, partly because of the Obama jobs plan, and partly because of the Administration’s need for allies in the Congressional Super Committee on deficit reduction.

So this sentence from Madame Lagarde’s speech most accurately describes her nuanced position:

“Risk levels are rising. 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.”

Just three months ago I was there when IMF acting MD John Lipsky clearly asked himself whether the UK should alter its macroeconomic policy: “The answer is No” was his clear answer in June. And I reported at the time the IMF endorsement rang so loud it could almost have been written by someone at Number 11. Today it was different. The answer was “No, but…”.

Why this shift? It’s not just an attempt to triangulate the altered position of Washington DC. Helpfully Madame Lagarde explained that the UK’s “policy path [in June] was premised on a greater role for private sector demand – especially a robust recovery in exports – to take over as the public sector retrenches. But since the summer, the outlook has become more subdued- including in the rest of the Europe and the US, the UK’s major trading partners. So risk levels are rising”.

The Chancellor does not need to be offended by that. The IMF is not blaming austerity. Just reflecting the reality that the global economic prospects have changed, dramatically over the past few months. And that there is a genuine concern that the private sector recovery will be insufficient. If correct, this is extremely serious. When seen with yesterday’s OECD projections (if accurate, since the month of the Spending Review to the end of this year, Britain will have grown by just one-eighth of the amount predicted by George Osborne’s first Budget) the situation has changed.

And that is the fundamental point that Lagarde is making. Not that austerity is wrong or too fast. But that the facts on the ground have changed. Slowing austerity might be Ed Balls’ approach. Conversely, unringfencing health and pouring the money into frontloaded infrastructure spending (CBI today called for more capital spending) would be a rather different method.

The Chancellor seemed to shove the ball to the Bank of England for more quantitive easing (for the first time in a year), but is there any evidence that this worked? What’s the point of QE lowering gilt yields from already record lows which are not really boosting the economy? Should they not be considering more radical forms of QE to get money to companies that employ people rather than banks? That would require the Chancellor to coax Mervyn King to use the Asset Purchase Facility in a manner that Alistair Darling wanted in 2009, but the BoE chose not take it up.

So Mme Lagarde has done us all a favour today. The economic facts on the ground are changing. And bogged down as we are in a political debate about whether the austerity tap should be turned down, I fear we’re being blinded to a more concerning economic reality.