6.6.2011
By Simon Miller
The International Monetary Fund (IMF) has backed the UK government’s austerity programme in spite of economic weakness and inflation rises.
In its mission concluding statement, the IMF says that aided by the implementation of a wide-ranging policy programme, “the post-crisis repair of the UK economy is underway”.
However, the weakness in economic growth and rise in inflation over the last several months was unexpected.
According to the IMF, this raised the question whether it was time to adjust macroeconomic policies.
“The answer is no as the deviations are largely temporary. Strong fiscal consolidation is underway and remains essential to achieve a more sustainable budgetary position, thus reducing fiscal risks,” said the IMF.
The fund pointed out that the inflation overshoot was driven largely by transitory factors, and “hence maintaining the current scale of monetary stimulus is appropriate given fiscal adjustment and subdued wage growth”.
The IMF said that a soft housing market, and headwinds from necessary fiscal consolidation, coupled with the ongoing process of household and bank balance sheet repair will continue to weigh on growth.
However, the fund adds, “recovery should be buoyed by private investment, as it rebounds from unsustainably low levels and is supported by low interest rates and corporates’ strong cash positions”.
In addition, net trade is improving along with global recovery and may benefit further if labour productivity rebounds and improves competitiveness.
“Led by these forces, expansion is expected to resume in 2011, though real GDP growth will remain a moderate 1.5% before accelerating gradually to around 2.5% over the medium term,” the fund added.
However, the IMF warned that there were still substantial risks around.
“Large risks to growth and inflation arise from uncertainties surrounding euro-area sovereign turmoil, the housing market, the size of the output gap, and commodity prices” said its report.
Another risk is uncertainty surrounding the size of fiscal multipliers and the degree to which private demand and net exports will be vibrant enough to pick up the slack from fiscal consolidation.
It continued: “Uncertainties arising from key risks are further compounded by the unusually large disconnect between recent weak GDP outturns and other indicators that are stronger (e.g., rising employment, higher-than-forecast tax revenue, and stronger private sector surveys), making it all the more difficult to ascertain the economy’s near-term direction.”
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