IMF urges UK to take further measures to promote growth

The International Monetary Fund (IMF) today (July 19) released the results of the 2012 Article IV Consultation with the UK, in which it urged policy-makers to take steps to boost growth.

"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," the staff report said.

The IMF said there was a threat that a sustained negative output gap could lead to long-term unemployment, the scrapping of idle capital and inadequate investment in innovation, which could permanently depress potential growth.

For this reason, the report said policy-makers should consider steps to support demand, including monetary policy, credit easing and fiscal adjustment.

During a conference call with reporters today, Ajai Chopra, the deputy director of the IMF's European department and UK mission chief, praised recent measures by the Bank of England to ease monetary policy, saying the latest £50 billion ($79 billion) expansion of quantitative easing was a "meaningful increase".

The IMF also said a cut in the policy rate should be considered. "Cutting the policy rate by 25 basis points could boost growth by 0.1–0.2 percentage points," the report said.

Recent measures to ease credit in the economy, including the Bank of England's funding-for-lending scheme and activation of the extended term collateral repo facility were welcomed. However, "it is difficult at this stage to quantify the likely impact of these new measures", the report said.

The IMF warned that despite progress in other areas, fiscal adjustment had restrained growth. Fund estimates suggested that the government's programme of fiscal consolidation had so far reduced GDP by a cumulative 2.5%.

The IMF warned the government may need to rethink fiscal policy if the economic recovery does not improve. "In particular, fiscal adjustment for FY13–14 would need to be scaled back if growth does not build momentum by early 2013," the report said.

Chopra said that the government's policies would create "additional fiscal drag" in 2013 if they were not altered, but added that it would be necessary to observe the effects of other policies before making fiscal adjustments. "We think it is important to start with monetary policy and credit easing," he said. He suggested the release of the government's budget in March would be the "natural time" to consider whether fiscal stimulus was necessary.

Fiscal easing measures should, the IMF said, be focused on higher infrastructure spending and temporary tax cuts that are targeted, for example, to lower-income households, "as these measures are more credibly temporary than increases in current spending," the report said.