IMF expects less of the UK and a lot of the US and Europe

Spanish property development The situation in the eurozone is still "precarious", the IMF says

The IMF's updated forecasts for the global economy make for depressing reading for anyone in the UK, but might seem reassuring to anyone concerned with the world recovery as a whole.

For all the sombre talk about the global recovery losing momentum, the Fund has only nudged down its global growth forecast for 2012 and 2013 - and the forecast for just the advanced economies hasn't changed much either.

But beneath the surface there is still plenty to worry about.

Back in the spring, the IMF thought the UK would grow by 0.8% this year and by 2% in 2012, but the new forecast pencils in growth of just 0.2% this year and 1.4% in 2013.

For Labour, and even some senior figures inside the Fund, this downward revision in Britain's economic prospects ought to re-open the argument over the government's deficit plans and the need for a "Plan B".

In its World Economic Outlook last September, the Fund said: "If activity were to undershoot current expectations, countries that face historically low yields should also consider delaying some of their planned adjustment." It specified that the countries it was talking about were Germany and the UK.

At that time, the Fund was expecting the UK to grow by 1.1% in 2011 and 1.6% in 2012. Now we know it grew by 0.7% in 2011 and, as I said, the Fund has lowered the forecast for 2012 to just 0.2%.

So, to say that activity has "undershot" last year's expectations would itself be an understatement.

But, we went through all this at the time of the Fund's Article IV Report on the UK, in May - when, you'll remember, the Fund's managing director Christine Lagarde went out of her way to praise Mr Osborne and his policies.

The government will be trying to sound creative on the subject of growth later this week, when it provides more details of its plans to leverage more private sector infrastructure and housing investments.

But I think we can be confident it won't be described as any Plan B. For its part, the IMF, in a separate update to its fiscal forecasts also released today, describes the government's decision to maintain its medium term target for the deficit as "appropriate".

Avoiding dangers

So much for the UK. What about the rest of the world? Should we be reassured that Britain is the only advanced economy to see a major downward revision in its forecast since the spring? Perhaps. But remember that these revisions are always to some extent a catch-up exercise.

President Obama at an event in which he talked about the economy Will the "fiscal cliff" problem be solved before the US elections in November?

The new global forecasts are broadly stable, only because the start of the year looks better than it did before. The months after the first quarter look a bit worse.

More important, the forecast of 1.4% growth in the advanced economies in 2012 and 1.9% in 2013 assumes that politicians in Europe and America get their act together in avoiding some very real and present dangers.

Looking at the fractious state of political debate on pressing economic issues, on both sides of the Atlantic, you can hardly say that is a sure thing.

As we know, there are a lot of gaps in the agreement hammered out by European leaders at last month's summit, and a lot of doubts about when and how they will take crucial steps like permitting the new European Stability Mechanism bailout facility to inject capital directly into troubled eurozone banks.

Argument is also raging, within and around the European Central Bank, over whether the ECB should do more to help push down borrowing costs for Spain or Italy, for example by buying more of their governments' debt.

But the fears about the eurozone and its financial system, though increasingly apparent in the market, are well known to everyone. What many in Europe have perhaps not focused on enough is the looming "fiscal cliff" in the US.

Without a new agreement on the budget between now and the start of next year, a series of automatic tax rises and spending cuts would lead to drastic budget tightening in the US of 4% of GDP in 2013 alone. As the Fund notes, somewhat unnecessarily, "this would severely affect growth in the short term".

Most people outside the US have always expected this to get sorted out after the general election in November - regardless of who wins. But I can't help noticing, lately, that people closer to the situation, in Washington, are much less confident.

On balance, experienced and sombre folk who have seen a lot of US budget battles come and go tell me they still expect the US to step back from the cliff. In the end, even a very polarised Congress will just about manage to strike a deal, it is thought. But they do not say this with any confidence. The rest of the world should realise it is very far from guaranteed.

We have spent the past 18 months worrying almost exclusively about the eurozone. By the end of the year we might well be worrying about the US.

Update 1700: Jonathan Portes, the director of NIESR and well known opponent of the government's budget strategy, has pointed out an interesting nugget from the IMF's new fiscal report, which I referred to earlier.

In considering the right pace of spending cuts and/or tax rises to meet a given deficit target, it says:

"Within these plans, and to the extent that market financing remains at sustainable rates, adjustment should take place at a steady pace defined in cyclically adjusted terms. On average, an annual pace of adjustment of about 1 percentage point of GDP—as in advanced economies in 2011-13—seems to be broadly adequate in reconciling the need to address the challenge of fiscal consolidation while managing risks to growth."

The Fund's own figures show the UK's cyclically adjusted - or structural - deficit declined much faster than this between 2010 and 2011 - by 1.8% of GDP.

The authors also note that the the structural deficit will fall by much less than this in 2012 and 2013, which they say "is fitting given the weak growth outlook."

So Mr Portes says the IMF's own analysis now suggests the coalition's deficit plan was too front-loaded, even if the IMF cannot or will not admit it.

Treasury officials greatly dispute this, pointing out that the IMF's rough rule of thumb for a 1 percentage point cut doesn't take into account the size of the structural deficit at the start.

The UK clearly needed to move faster, in the Treasury view, because its structural hole was a lot larger than most.

The chancellor would also argue that the UK's cost of borrowing only remained "at sustainable rates" because of the tough stance taken on the deficit - something Mr Portes and other critics of the government would say owes more to the fact that the UK, unlike other high borrowers in the eurozone, has its own currency.

All of which is to say, the debate about deficit strategy is alive and kicking, even if the economy isn't.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 151.

    148. Up2snuff

    You do not grasp the significance of LIBOR!

    To call something an OFFERED rate when it has ceased to be an OFFERED actually matters!

    You don't seem to grasp this.

    The whole thing is a fraud. (or rather has been since the mid naughties at least)

    Fiddling it rigs interest rates.

    It is not a bee in my bonnet! These are the facts. (I do not misunderstand LIBOR - I guess you do!)

  • rate this

    Comment number 150.

    @149 Aircraft
    Pray explain and/or list occasions. There have been a few and I will plead guilty if justified. :-)

    But J_f_H has got a bee in his bonnet over a misunderstanding of LIBOR, where the '05 apparent fraud occurred & its likely effects beyond the trades and actual inter-bank lending.

    (Seems too much like a sagamix post - its getting to me!)

  • rate this

    Comment number 149.


    You have got a nerve. Missing the point seems to be your only ability.

  • rate this

    Comment number 148.

    Go & look LIBOR up on Wikipedia and stop being dense!!

  • rate this

    Comment number 147.

    So it comes down to private litigation.
    The legal System v The Banks

    This is going to be close.

  • rate this

    Comment number 146.

    "So the Government is liable to make good the consequences"

    I don't know where to start. Police responsible for not preventing theft? How many examples of you logic being ridiculous do you need?

  • rate this

    Comment number 145.

    144 +

    When LIBOR was ACTUALLY a rate at which banks swapped money it had some meaning.

    To be not a fraud money MUST actually be exchanged at the OFFERED rate.

    The key is the regulator should have ensured it was real.

    He did not do so.

    So the Govenrment is liable to make good the consequences of his error - as in Equitable Life!

    On RP's blog I set out a correction mechanism. (of £150bn)

  • rate this

    Comment number 144.


    I repeat LIBOR is the London Inter Bank OFFERED rate.

    That it it has to be 'offered' or it is a fraud.

    It ceased being 'offered' sometime in the middle of the last decade.

    So to claim that the Thomson/Reuters collected data isn't worth the electronic bits that make it up!

    And in consequence ANY deal based on LIBOR is a fraud since that time.

    The economic wall was made of mythical bricks!

  • rate this

    Comment number 143.

    Rosetta, 2005 and 2009 were different things. 2005 appeared to be unknown traders clearing bad positions or massaging their profits.

    2009 was a minuted telephone call & a discussion between executives and beyond that we do not know much about the before and after.

  • rate this

    Comment number 142.

    No projects annnouced yesterday are by & large extremely wasteful & are extremely difficult to justify on any other basis than Cons tryign to buy votes in the Midlands. Companies will not invest in these projects bec they see little potential for ROI; infact most of these lines lose subst amts of money and rely on hug subsidy.

  • rate this

    Comment number 141.

    re#137 fTP
    Silly rail projects?


    I agree.

    East Coast and other mainline improvements I think are a really good idea. Quite why taxpayer&user has to pay when £billions are available to private rail cos. at almost no cost from Banks, I do not know!

  • rate this

    Comment number 140.

    Ed Balls has gone a little quiet..thankfully. He helped cause the mess, then claimed we need to borrow more like the USA and their wheels are falling off! A mini high street boom isn't the answer Eddie!! He then started gobbing off about LIBORgate until it was kindly pointed out that he was in the middle of it all. What a buffoon!

  • rate this

    Comment number 139.

    J_f_H, go and look at what LIBOR is, what it is for, how it is moved, what it influences and what influences it.

  • rate this

    Comment number 138.

    KH - growing inequality - stagnation results whether surpluses are seized by the state or saved as bank deposits/asset purchases by the rich. Max growth occurs if cash is spent on manufactured goods or risked for their production (UK industrial revolution) not on debt/inflated assets (ie now). Fiscal stimulus can help at the margin, but at the limit redistribution also creates stagnation.

  • rate this

    Comment number 137.

    136. And wasting money on silly rail projects. Bastiat has much to say to us today about this absurdity also. What is seen and was is unseen and the parable of the broken. The amt of nonsense spouted in last day or so about how running trains to nowhere will create jobs!

  • rate this

    Comment number 136.

    Like the quote - very apposite! :-)

    That's another thing I find depressing about Dave & GO: their solution to a lot of things is - loans, more debt, borrow ...

  • rate this

    Comment number 135.

    116. U2S

    No, LIBOR is a fraud. It became a fraud as soon as virtually no money passed on the basis of the rate.

    It is the London Inter Bank OFFERED rate. That is it pretends to be a rate that is on OFFER. As soon as no deals were being done at the rate it became a fraud.

    Th fraud was upon everyone outside the banks that had contacts based on LIBOR.

    Lenders (& borrowers) are being defrauded.

  • rate this

    Comment number 134.

    132. perhaps you would prefer a system in which politicians dictated what we may or may not spend our money on? People make decisions about how they spend their money based on what they consider will maximise their (families) wellbeing. They are the best judges of how to use their economic resources to pursue their own goals. Or perhaps you know best?

  • rate this

    Comment number 133.

    Surely this is a zero sum situation?'
    That is what everyone is hopeing for, (JP Morgan, et al) however it's impossible to tell with so many derivatives involved, but this is not the only area at risk.

    The LIBOR fixing has been noted 2005. 2009 was only when it became too big to hide.
    I'll looking into R4's 'More or Less', but there are lots of other sources.

  • rate this

    Comment number 132.

    The totally unsustainable consumer-based economic growth system must, it seems, go into complete and utter collapse before everyone realises that having people buy more stuff year on year on year is the most stupid system for our planet imaginable.


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