22 May 2012

UK should ease austerity to boost growth, says IMF

Britain should cut interest rates and consider quantitative easing to stimulate growth, the IMF says, on the back of reports showing 3 per cent inflation and predicting the recession is almost over.

Christine Lagarde, a French head of the International Monetary Fund, complimented the British government’s handling of the economy, noting the results were clear: “the credibility of the UK government and its ability to borrow at extremely extremely favourable rates.”

The Organisation for Economic Co-operation and Development meanwhile predicted Britain would grow 0.5 per cent in 2012 and increased its 2013 prediction to 1.9 per cent. Separately, figures showed a drop in the annual UK inflation rate to 3 per cent in April, the lowest rate since February 2010.

“Sometimes you feel like you can look back and wonder: ‘What if?’ When I think back myself to May 2010, when the UK deficit was at 11 per cent and I try to imagine what the situation would be like today if no such fiscal consolidation programme had been decided… I shiver,” Ms Legarde told reporters in London as the IMF issued its UK outlook.

Unemployment woes

Still, Ms Legarde noted more could be done to stimulate growth.

“Unfortunately the economic recovery in the UK has not yet taken hold and uncertainties abound. The stresses in the euro area affect the UK through many channels. Growth is too slow and unemployment – including youth unemployment – is too high. Policies to bolster demand before low growth becomes entrenched are needed,” she said.

She called on the Bank of England to boost quantitative easing and to cut interest rates, currently at 0.5 per cent, to boost demand.

UK unemployment is at 8.6 per cent and expected to rise to 9 percent in 2013, according to OECD figures - still that is well below Spain, where on in four are unemployed, and Greece, where one in five

UK unemployment is at 8.6 per cent and expected to rise to 9 percent in 2013, according to OECD figures – still that is well below Spain, where on in four are unemployed, and Greece, where one in five are not working. (See chart to view how the UK unemployment rate compares to the 10 European countries with the highest number of jobless residents.)

Further “stresses” in the eurozone are coming from Greece, Spain, Portugal and Italy, with cash-strapped banks causing jitters in the stock and bond markets. With much of southern Europe struggling, the 17-member eurozone economy was expected to shrink 0.1 per cent in 2012, the OECD said.

Greek crisis

Greece, now in its fifth year of recession, will keep shrinking until mid-2013 – and unfortunately, that is the good news. The prediction depends on Athens fully implementing reforms under a 130bn euro bailout plan offered by the EU and IMF. The Greek economy is expected to shrink 5.3 per cent this year after a 6.9 per cent slump in 2011,

Austerity fatigue may hamper the pace of reforms, however. Greece holds crucial elections on 17 June that could determine if it continues to get bailout funds and remain in the eurozone.

“Staying in the eurozone will be costly, but leaving the eurozone will be much more costly for Greece and for the other countries,” OECD chief economist Pier Carlo Padoan said.

The other good news?

“We see a slow rebound of growth in the United States driven mostly by private demand, some pick-up in Japan and moderate to strong growth in emerging economies,” Mr Padoan said.

While Europe’s financial instability is threatening a fragile world recovery led by the US and Japan, global growth was to ease to 3.4 per cent this year from 3.6 per cent in 2011 before accelerating to 4.2 per cent in 2013, the OECD predicted.

The US – the world’s biggest economy – was predicted to benefit from loose monetary policy and easy credit conditions, with a growth forecast of 2.4 per cent this year and 2.6 per cent in 2013.

China, the export giant, was expected to see growth rise from 8.2 per cent in 2012 to 9.3 per cent in 2013 along with interest rate cuts and increased social spending.

But Greece, yet to form a government and heading to the polls, remains the unpredictable wild card threatening to shake up the high-stakes economic poker games being played out worldwide.