IMF: UK 'still a long way from recovery'

The International Monetary Fund (IMF) today put pressure on British Chancellor George Osborne to change economic course in a critical assessment of the state of the British economy.

Prospects for growth remain weak and the UK is “still a long way from a strong and sustainable recovery”, according to its annual economic health check.

Worryingly, assessors warned there is a key risk that persistent slow growth could “permanently damage medium-term growth prospects”.

After five years of relatively weak activity “additional measures are needed to raise long-term expectations of potential growth”, according to the report.

Earlier this month, the Chancellor insisted the Government’s plan was working and there would be no change in direction.

But today’s article four report, which comes after economists spent two weeks in London carrying out an in-depth assessment of Britain’s fortunes, is likely to be seized upon by Labour as backing up their calls for a “plan B” to revive the economy.

The IMF said there encouraging signs of some improvement in conditions, pointing to “notably strong” growth in private sector employment, increased demand for vehicles, and improvements in business and consumer confidence.

Despite recent improvements, however, Britain’s GDP remains 6% below pre-crisis levels “making this the weakest recovery in recent history”.

It raises concerns that capital investment is proportionally at a post-war low and that youth unemployment levels are high.

Consolidation to tackle rising public debt is a “drag on growth” and an a wider strategy is needed, it adds.

The IMF backed monetary policy measures unveiled by the Chancellor in the March Budget and changes to the Funding for Lending Scheme aimed at boosting business growth.

It also said the Government’s medium term plans have earned it “credibility”. “Reducing the large structural deficit over the medium term is essential,” it states.

But planned fiscal tightening “will be a drag on growth”, the IMF warns.

It calls on the Government to consider a range of measures, including bringing forward planned capital investment to fuel growth, and reviewing areas of corporate tax as well introducing reliefs for raising equity.

A reform of property taxes and imposing VAT on a wider base could cover the cost of the measures, it suggests.

But the IMF issued a warning over Help to Buy, the Government’s flagship Budget measure aimed at boosting growth, suggesting there is a risk it would ultimately lead to higher house prices, which would “work against” the aim of boosting access to housing.

The Government should also pursue with “greater vigour” investment in infrastructure and banking sector reforms.

“The prospect remains for weak growth,” the report states. “Given ongoing domestic deleveraging pressures and weak external demand, activity is expected to pick up only gradually. Similar to the view of the Office for Budget Responsibility, the most likely scenario is a prolonged period in which output is below potential.

“Risks remain tilted to the downside. The key risk is that persistent slow growth could permanently damage medium-term growth prospects – this could arise if private sector deleveraging is larger than expected, credit conditions fail to improve, external demand does not pick up, and the drag from fiscal consolidation is greater than anticipated.”

It added: “Restoring growth momentum and rebalancing the economy is vital. Strong growth is needed to restore incomes, ensure the sustainability of public debt, and restore bank balance sheets.

“For long-term prosperity and resilience against future shocks, the economy has to be diversified and not reliant on domestic consumption.

“These imperatives have supply as well as demand dimensions – after five years of relatively weak activity, additional measures are needed to raise long-term expectations of potential growth, while rebalancing necessitates a transformation to a high-investment and more export-oriented economy.”

Mr Osborne said he agreed with the IMF that “now is the time for a clear strategy on how to return RBS and Lloyds to the private sector in a way that protects value for the taxpayer”.

He added: “The Parliamentary Banking Commission that I established is completing its work and we will then set out the way ahead. We need functioning banks supporting the real economy instead of nursing their wounds, and I am determined we will deliver that.”

Speaking at the report's launch at the Treasury, the IMF's deputy managing director David Lipton said the Uk government should take advantage of the low interest rates it is currently paying on sovereign debt to fund investment in infrastructure and tax incentives to invest.

Mr Lipton also said that the Bank of England should make clear it is going to keep interest rates low, and that the Government should be prepared to take a loss on the return of RBS and Lloyds banks to the private sector.

“The UK needs a multi-pronged strategy, including more forceful action in the areas of monetary, financial sector, fiscal and structural policies,” said Mr Lipton.

“That multi-pronged strategy is needed to address demand and supply constraints and get the economy to greater and more balanced growth.”

Mr Lipton said it was important to ensure banks lend more to small businesses and to return part-nationalised banks to private ownership “in a shape to resume lending activity”.

In a clear sign that the Government should be ready to take a loss on the deal, he added: “If a sovereign backstop is required to meet a capital shortfall in that context, that should be provided, as it would have a high multiplier in terms of economic growth.”

Mr Lipton added: “Without investment in infrastructure and skills to boost the long-term productive and export potential of the economy, private sector expectations of future incomes will remain suppressed.

“This in turn will weigh upon consumption and investment and demand.”

He added: “We suggest that Govenrment bring forward planned capital spending and consider measures such as reducing the marginal tax rate on investment and introducing tax allowances to raise equity.

“Those things would catalyse private investment.

“With sovereign yields at historic lows, the benefits from these measures in terms of economic growth would be substantial.”

He added: “We recognise that higher fiscal support for the economy is not a straightforward choice as the deficit is still high, but the Government’s credible medium-term consolidation plan, coupled with the UK’s strong institutions and long-duration debt afford space to provide this support.”

Mr Osborne added: ``The IMF's in-depth analysis has shown policy remedies to restore growth and rebalance the economy are not straightforward.

“There are no easy answers to problems built up in the UK over many years. It’s a hard road to recovery but we are making progress.

“And the news this week that inflation has fallen and borrowing continues to fall are the latest evidence of that.

“Of course there is further to go and we have to go on confronting the difficult choices to help our economy to heel.

“So I agree with the IMF that the best approach to this is a multi-pronged one. Our strategy is just that.”

He added: “I agree that it’s right to prioritise infrastructure investment where we can, that’s why we are investing more in capital than my predecessor had planned, that’s why I have added in the last few years to those plans and that’s why it will be a focus of the spending round next month.”

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