Time to heed IMF warning on UK recession
With Wednesday’s GDP figures expected to confirm that the UK is still in recession, the government should heed IMF warnings about the need to change course
The latest IMF commentary on the UK economy, released last week, urges the government to rethink its economic recovery plan. This is not its first warning. Only in May, the IMF was calling for changes to monetary and fiscal policies if the UK remains in recession for a third quarter (as now seems very likely).
The IMF has now downgraded its UK economic growth forecast to just 0.2 per cent in 2012, down from the 0.8 per cent it was expecting in April. This is the largest downgrade experienced by any advanced economy. Unless a country is in the midst of a crisis, like Greece, the IMF is traditionally very reluctant to criticise its policies. But, with each successive report, the IMF’s message on the UK is increasingly leaving little room for interpretation: the government needs to change course.
The coalition hoped that its deficit reduction plan would boost the economy by guaranteeing greater confidence and certainty about the future; in fact, it has had the opposite effect. As the IMF says: ‘Recovery has stalled. Post-crisis repair and rebalancing of the UK economy is likely to be more prolonged than initially envisaged. Confidence is weak and uncertainty is high.’
In the past, IMF reports have avoided apportioning blame to the current coalition government. The full report issued by the IMF last week, on the other hand, is more direct. It says that fiscal consolidation in the last two financial years subtracted roughly 2.5 per cent from growth and states: ‘Looking ahead, the economy is expected to grow modestly, but with current policy settings the pace will be insufficient to absorb significant slack in the economy, raising the risk of a permanent loss of productive capacity.’
Given the poor economic outlook, the IMF suggests the government acts quickly and implements measures that will boost consumer confidence and encourage growth. In particular, the report says, if the economy continues to falter between now and the next fiscal tax year, the government should scale back planned fiscal tightening for 2013-14.
Getting back on the path to recovery will require more than scaling back fiscal policy. A report just published by IPPR suggests that economic recovery will also require reforms to address long standing weaknesses in the UK economy: underinvestment, vulnerability to external shocks, a poor export performance and persistent inequalities. Additionally, the path back to recovery should be imagined as a path back to a different kind of British capitalism.
To get us there IPPR recommends a roadmap for growth with six elements:
- An increase in the scale of quantitative easing
- Fiscal measures to boost growth in the short-term combined with a reaffirmation of the plan to eliminate the deficit in the medium-term
- Additional infrastructure spending
- Measures to make household debt restructuring easier
- Measures to keep the long-term unemployed in touch with the labour market
- An active industrial policy
Some of these measures will require upfront costs and this will mean more short term borrowing to boost growth, but as the IMF says bluntly: ‘The UK has the fiscal space to make such adjustments.’. Failure to act will lead to further human cost. Despite recent falls in the jobless total, there are more than 1 million additional people unemployed now than there were before the recession began. More than a third of all jobseekers have been out of work for more than a year.
It is clear from economic analyses, including that of the IMF, that policy in the UK needs to be redirected towards different aims – boosting short term growth, getting people back into work, and getting businesses and consumers to invest and spend once again. The government has shown some glimpses of flexibility – the ‘funding for lending’ scheme worth up to £80 billion is an example of that. However more action is still needed. Will the government accept the IMF’s analysis and deviate from its Plan A? If not, this is unlikely to be the IMF’s last warning for the year.
The stakes are high. The double dip recession and sluggish nature of the recovery mean that economic growth in the first 15 years of the 21st century will be a cumulative 11 per cent below what might have been expected based on prior history. In current terms, that means the UK economy is set to lose £165 billion pounds of GDP. Much of that loss occurred in the past and cannot now be retrieved. But action can be taken to limit future damage and the coalition needs to act soon and decisively.