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IMF health check on the UK economy
8th August 2008
Tucked away in between a report on financial stability in Moldova and standards and codes of business in Azerbaijan lies the latest health check on the UK economy from the International Monetary Fund. There is plenty of decent macroeconomics in there for A2 economists preparing for the Bank of England competition later on this autumn - but the IMF is true to its traditions - preaching fiscal and monetary policy orthodoxy during these turbulent times.
The full report on the UK can be downloaded here
Briefly:
Flirting with recession: IMF staff now project a UK growth rate of 1.4 percent for 2008 as a whole, falling to 1.1 percent in 2009 - easily the weakest growth performance since the recession of the early 1990s
CPI inflation is also expected to be higher than anticipated in the staff report, peaking at close to 5 percent, and averaging 3.8 percent in 2008. It is still expected to return to target by 2010, given wage moderation and a stronger disinflationary impetus from the economic slowdown - but according to the IMF, the key for the Bank of England rate-setters is to avoid a wage price spiral.
Both the sustainable investment fiscal rule and the inflation target are set to be exceeded for protracted periods - the IMF urges the government not to alter the existing fiscal rules in their pre-Budget report this November. Of coyrse there is a difference between altering the rules and just not meeting them!
IMF measures suggest that sterling is overvalued as a currency by between 5-10% - so even allowing for the recent fall in the pound’s value in global currency markets, some further exchange rate adjustment is needed to at least make a dent in our record trade deficit and worsening current account position.
There are many similarities between the UK and USA - not least a worsening of credit availability, a collapse of household saving and exposure to a fallin property market - but the silver lining is that subprime loans constitute about 6 percent of the total mortgage market in the U.K. compared to 13 percent in the USA
BBC news “IMF downgrades UK economic growth”
Guardian: 15-year boom has left Britain with multiple aftershocks
Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.