IMF Gives Stark Warning To UK Over Eurozone

"Growth is too slow and unemployment, including youth unemployment, is too high.''

IMF Gives Stark Warning To UK Over Eurozone
Tuesday, May 22nd 2012 10:44

 Britain may have to cut interest rates and VAT to stimulate the economy amid the eurozone crisis, the International Monetary Fund has warned.

But the IMF backed the UK's deficit reduction plan, saying "substantial progress" had been made on balancing the books.

The head of the fund, Christine Lagarde, warned the eurozone crisis could prolong the UK's recession and urged the Bank of England to take action to boost growth and reduce unemployment.
She advocated a cut in the base rate of interest, which has remained unchanged at a historic low of 0.5% for over three years.

In a report on the UK, the IMF warned an escalation of the crisis would deliver a "substantial contractionary shock" to the UK economy, setting back progress made towards recovery.
It said the Government should start preparing a Plan B, featuring temporary tax cuts and increased spending on infrastructure, to support the UK economy.

Britain entered a double-dip recession during the first quarter of the year after the economy contracted by 0.2%, following a decline in Gross Domestic Product (GDP) of 0.3% in the final three months of 2011.

The IMF identified uncertainty over the future of the euro as the main danger to recovery and warned: "Risks are large and tilted clearly to the downside."

The report recognised "substantial progress" towards balancing Britain's books thanks to the coalition Government's deficit-reduction programme, but noted the economy remains "flat" and warned the weak recovery may be "more protracted than previously anticipated".

IMF managing director Ms Lagarde put pressure on the Bank of England for further monetary stimulus to revive the economy.

She said: "Growth is too slow and unemployment, including youth unemployment, is too high.
"Policies to bolster demand before low growth becomes entrenched are needed."

In an endorsement to Chancellor George Osborne's economic strategy, Ms Lagarde added: "The UK authorities' policy approach has reinforced credibility at a time of intensified global uncertainty."
Referring to the UK's budget deficit, Ms Lagarde said she "shivered' when she thought about what would have happened if it had remained at the 11% of GDP level it reached in May 2010.

As debt-laden Greece teeters on the edge of being forced to leave the euro - leading to a potential catastrophe across the single currency bloc - the Chancellor said the UK was preparing for all eventualities.

"The British government is doing contingency planning for all potential outcomes.

"It's our responsibility to ensure that while we work for the best, we prepare for something worse," said Mr Osborne, who was speaking at a joint press conference with Ms Lagarde.
He added: "It's clear we're now reaching a critical point for the eurozone.
"Eurozone countries need to stand behind their currency or face up to the prospect of a Greek exit with all the risks that that would involve."

The Chancellor also admitted ministers needed to do more to tackle unemployment, which currently stands at 8.2% despite modest falls over the last two months.

Shadow Chancellor Ed Balls, who would like to see a less radical approach to cutting the deficit, told Sky News that Mr Osborne's plan had "failed".

============= The OECD warned the eurozone is facing a "severe recession" which poses a threat to economies across the world.

"The IMF is saying the UK economy is under-performing and needs urgent action to get jobs and growth moving," he said.

The IMF warning came as UK inflation fell to its lowest level in more than two years, providing welcome relief to household budgets.

Meanwhile, the Organisation for Economic Co-operation and Development revised downwards its outlook for the eurozone.

It said it expects the euro area's economy to contract by 0.1% this year, compared to a previous forecast of 0.2% growth, before returning to positive output in 2013.

The OECD warned the eurozone is facing a "severe recession" which poses a threat to economies across the world.

"The crisis in the euro area has become more serious recently, and it remains the most important source of risk to the global economy," said OECD chief economist Pier Carlo Padoan.

The group left its outlook for 2012 for the UK economy unchanged at growth of 0.2%.

US and Japan economic recovery but still fragile - OECD

Tuesday, May 22nd 2012 - 18:39 UTC

US and Japan leading economic recovery but still fragile says latest OECD report

The United States and Japan are leading a fragile economic recovery among developed countries that could yet be blown off course if the Euro zone fails to contain its flaring growth crisis, the OECD said on Tuesday.

 In its twice-yearly economic outlook, the Paris-based Organisation for Economic Co-operation and Development forecast that global growth would ease to 3.4% this year from 3.6% in 2011, before accelerating to 4.2% in 2013, in line with its last estimates from late November.

 

Growth across the organisation's 34 members, generally the wealthiest in the world, would ease this year to 1.6% from 1.8% in 2011 and then reach 2.2% in 2013, also roughly in line with previous estimates.

 

“We see a slow rebound of growth in the United States driven mostly by private demand, some pick-up in Japan and moderate to strong growth in emerging economies,” OECD chief economist Pier Carlo Padoan told reporters in an interview.

 

“We also see flat growth in the Euro area which hides important differences, with northern countries growing and southern countries in recession,” he added.

 

The OECD forecast that the 17-member Euro zone economy would shrink 0.1% this year before posting growth of 0.9% in 2013, though regional powerhouse Germany would chalk up growth of 1.2% in 2012 and 2.0% in 2013.

 

Although OECD economies were on the mend, the Euro zone's debt crisis could still spiral out of control with Greece struggling to remain solvent and Spanish banks needing to be recapitalised, Padoan said.

 

The European Central Bank's injection of one trillion Euros of liquidity into the Euro zone's banking system and an increase in European bailout funds and IMF reserves had helped keep the Euro zone's debt crisis from spiralling out of control.

 

“If the situation gets worse, there are ways to enhance the firewall capacity which could include a stronger intervention or role of the ECB,” Padoan said.

 

In particular, the ECB should not rule out buying government bonds again to keep borrowing costs down, lending to the ESM European bailout fund as well as cutting its main benchmark interest rate, which currently stands at 1.00%. The ECB could also consider another injection of liquidity into the banking system.

 

In contrast to the Euro zone, the United States was expected to continue to benefit from easy credit conditions and ultra-loose monetary policy, with the world's biggest economy forecast to grow 2.4% this year and 2.6% in 2013. In November, the OECD had forecast 2.0% for 2012 and 2.5% for 2013.

 

Although some budget tightening and a still weak housing market would be a drag on growth, demand in the private sector would continue to strengthen as the unemployment rate to as low as 7.5% by the end of 2013 from 8.1% in April.

 

The OECD said that while the US needed to step up the pace of its fiscal tightening, if tax cuts were allowed to expire as scheduled in 2013 it could result in too much cutting at once and threaten growth.

 

The Japanese economy was set to grow 2.0% this year and 1.5% in 2013 as a reconstruction boom after last year's earthquake and tsunami faded although recovering world trade would offer support.

 

A rebound in global trade would be a bright spot for many economies, with the OECD forecasting it would surge from 4.1% this year to 7.0% in 2013.

 

Export-giant China was forecast to see growth rebound from 8.2% this year to 9.3% in 2013 as interest rate cuts and increased social spending propped up domestic demand in the non-OECD member country.