The IMF downgraded its UK growth forecast today for the third time in under a year. It forecasts growth of just 0.2 per cent this year, compared to 0.8 per cent in April 2012, 1.6 per cent in September 2011 and 2.3 per cent in April 2011, as Chart 1 shows.
Responding to the IMF downgrade, shadow chancellor Ed Balls said it was “more evidence” of the government’s failure, adding Britain would pay a “heavy long term price” if the coalition fails to right the economy:
“These very disappointing forecasts – with the UK seeing a bigger downgrade than any other G8 country – are yet more evidence that the government’s economic plan has failed.
“Last autumn the IMF forecast growth of just 1.6 per cent this year and warned that if those expectations were undershot, the government should take urgent action to boost the economy including temporary tax cuts and more investment in infrastructure.
“Less than a year on, the IMF is now forecasting growth of just 0.2 per cent this year and Britain is one of just two G20 countries in a double-dip recession. And the recession means borrowing is now going up.
“David Cameron and George Osborne must now accept they need to act to get the recovery back on track. There can no longer be any excuses for delay. We need a change of course and urgent action now to boost the British economy. If we fail to act now, and we see years of slow growth and high unemployment being entrenched, Britain will pay a heavy long term price.”
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The IMF has repeatedly urged a change of course, warning the government’s policies risk damaging the recovery:
“If activity were to undershoot current expectations and risk a period of stagnation or contraction, countries that face historically low yields (for example, Germany and the United Kingdom) should also consider delaying some of their planned consolidation.”
- IMF Regional Economic Outlook, October 2011, (page 14, pdf)
“Fiscal easing and further use of the government’s balance sheet should be considered if downside risks materialize and the recovery fails to take off. In particular, if growth does not build momentum and is significantly below forecasts even after substantial additional monetary stimulus and further credit easing measures, planned fiscal adjustment would need to be reconsidered…
“Fiscal easing measures in such a scenario should focus on temporary tax cuts and greater infrastructure spending.”
- IMF Article IV consultation, May 22nd 2012
“Policies to bolster demand should help close the output gap faster. It needs to be recognized that policy options in this regard come with risks, including uncertainty about their effectiveness. However, these risks need to be weighed against the risk of weak demand that leads to persistently slow growth and high unemployment that become entrenched in decisions made by consumers and investors.”
- IMF Article IV consultation, May 22nd 2012
“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. So the challenge is to find the pace of adjustment that is neither too fast, nor too slow. The precise path of fiscal consolidation will differ by country.
“Those that are facing considerable market pressure, or could face it in the absence of upfront adjustment, must press ahead with fiscal consolidation now. But in others, there is scope for a slower pace of consolidation, combined with policies to support growth. The key is to clarify a credible medium-term strategy to first stabilize, and then lower debt ratios.
“Within this strategy, fiscal measures that reliably deliver savings tomorrow will help create space for supporting growth today – by permitting a slower pace of consolidation.”
- Christine Lagarde, Managing Director of the IMF, speech, London, September 9th 2011
“Growth is necessary for fiscal credibility – after all, who will believe that commitments to cut spending can survive a lengthy stagnation with prolonged high unemployment and social dissatisfaction?”
- Lagarde, speech, Jackson Hole, August 27th 2011
“For the advanced economies, there is an unmistakable need to restore fiscal sustainability through credible consolidation plans. At the same time we know that slamming on the brakes too quickly will hurt the recovery and worsen job prospects. So fiscal adjustment must resolve the conundrum of being neither too fast nor too slow.
“Shaping a Goldilocks fiscal consolidation is all about timing. What is needed is a dual focus on medium-term consolidation and short-term support for growth and jobs.”
- Lagarde, FT op ed (£), August 16th 2011
“If the economy experiences a prolonged period of weak growth and high unemployment – and if inflationary pressures consequently ease – fiscal automatic stabilizers should operate freely (as the fiscal mandate is designed to allow) and the current monetary policy rate should be maintained for an extended period.
“In such a risk scenario, it will important to ensure that the slowdown does not become entrenched due to capital scrapping and cyclical unemployment becoming structural.
“This is not the central scenario, but if this appears to be in prospect, then some combination of the following would need to be considered: (i) expanded asset purchases by the Bank of England and (ii) temporary tax cuts.”
- Article IV statement on the UK, IMF, June 6th 2011
There was encouraging news from Ernst & Young, however, who today suggested the Olympics would aid the UK economy’s “Indian Summer”, with a combination of Games spending and falling inflation helping lift Britain out of recession – though even then, the Item Club optimists forecast zero growth for the economy in 2012.