IMF slashes UK’s growth forecast
By Philip Cockayne
The UK’s 2012 and 2013 growth forecasts have been slashed in the International Monetary Fund’s (IMF) World Economic Outlook report, which was published at the end of January. The UK’s predicted GDP (Gross Domestic Product) figures have been cut from 1.6% to 0.6% in 2012, and are down from 2.4% to 2% for 2013.
Although they are predictions, coming from the IMF, they tend to be accurate. The GDP figures indicate the total output of goods and services the UK produces over a specific period of time, so in essence, the figures represent a fall in forecasted output for the UK. This has sparked fears of the UK entering a double-dip recession. The UK unemployment rate is at 8.4%- the highest for a record 17 years.
“Unfortunately, UK economic activity is likely to get worse before it gets better, with a technical recession likely to be confirmed by first-quarter 2012 GDP numbers,” said ING economist James Knightley.
According to the IMF, the figures were downsized due to the unreliable growth forecast for the Eurozone economies which the UK’s own growth is heavily dependent on.
Christine Lagarde, the Managing Director of the IMF prophesised the coming of a reoccurrence of the situation seen during the Great Depression of the 1930’s if the current crisis in the Eurozone could not be controlled.
But such is the depth of the Eurozone debt crisis that this would make the UK, rather astonishingly, the best performing major economy in Europe. Germany is set to grow just 0.3% and France 0.2%, but the UK will fall behind the US and Japan, which are expected to grow 1.8% and 1.7% respectively.
Lagarde warned that the ever inflating sovereign debts of Spain and Italy are threatening stability amongst the single currency economies. The report downgraded the Eurozone GDP from 1.1% predicted growth to a 0.5% decline. Although Lagarde said that economies were “decelerating but not collapsing”, the outlook in Europe is far from positive and that we are staring “deeply into the danger zone” for a global recession. A particular demoralising note in these figures is that they are based on the continuation of France and Germany’s assistance through the European central banks and the European Financial Stability Fund (EFSF), many of which have been downgraded recently after both France and Austria (two key funding nations) lost their AAA ratings.
The IMF warned that growth rates in Europe would affect the whole world; even emerging economies that had been rendered relatively unscathed by the economic problems in the Western economies. This was reflected in the global economic outlook being reduced from 4.1% growth to 3.25%.
Following on from these predictions of doom and gloom, Miss Lagarde called for caution to be taken with current austerity measures. She called for countries with a stable fiscal plan to consider the easing of radical cuts which threaten to increase unemployment, ward off investment and stagnate potential growth. Although these precautions were directed at Germany, Ed Balls jumped on the opportunity to criticise Osborne’s austerity measures and stated that “Last year the IMF was clear that if growth undershot expectations then the British government should reconsider the pace of spending cuts and tax rises which choked off our recovery”. Ed Balls offers a firm critique of George Osborne’s spending cuts and calls for further borrowing, which largely fell on deaf ears as the Office of Budget Responsibility, the main economic advisory department, stated that the IMF’s predictions of growth were not to far from their own.
Not surprisingly, the situation is as dire as it has been for the past 6 months, if not worse. The Eurozone countries have called on their central banks to consolidate their finances before the next financial instalment. Following on from this, a ban on leveraging (investing beyond your assets) has been imposed, despite being heavily criticised by the IMF. This means that until the next bailout package is secured, the central banks are in chains, therefore, cannot do much to assist in bringing stability. These implications further lead to a stalemate in finding a solution to the on-going crisis.
“Britain has substantial debts and if we don’t deal with those debts our economic problems will be substantially worse,” Osborne said, speaking a day after the IMF slashed its global economic forecasts due to the Eurozone crisis. “We’ve got to accept that Britain’s economic problems – difficult as they are, built up as they have been over the last ten years – have been made worse by the situation in the Eurozone, by the crisis on our doorstep.”
Sir Mervyn King hinted that another round of Quantitative Easing is on the cards, “Starting from a position of excessively leveraged balance sheets, the path of recovery is likely to be arduous, long and uneven. The position of the world economy, especially in the euro area, is serious. But there is no reason to despair. Helped by the right policy actions, the UK and world economies can and will recover. And when they do so, they will be on a more sustainable footing than at any point in the past 15 years.”
Christine Lagarde’s warning however should be heeded by both Osborne and King if the UK is to recover from the crisis. With the next Quantitative Easing fund in discussion, growth forecasts below expected, public debt at just over £1 trillion (around 64% of our GDP) and austerity crippling any hope of growth, both major parties are throwing fiscal punches left, right and centre and each providing adequate criticisms in response. It would appear that the monetary geniuses in government and in the opposition are running out of arguments.