WHERE is the fragrant Christine Lagarde? And where is “Team IMF” which flew into the UK last Wednesday for a week-long assessment of the UK’s books?
Time was when the arrival of poker-faced officials from the IMF would have hundreds of jostling news cameras at Heathrow, the stock market plunging and the news headlines screaming panic. Was the flight delayed? Did they travel incognito with Ms Lagarde in a burqa? Or did they get held up by immigration?
Of course, this time it’s different. The UK is not requesting an IMF loan. The pound is not on the skids – indeed, there may be some regret at the Treasury that it hasn’t fallen far enough. And the stock market has been enjoying a boom, with the FTSE-100 pushing ever closer to five-year highs. This is not 1976.
The visit forms the cornerstone of the IMF’s “Article IV” economic health-check. And at the Treasury tension is in the air. The visit has been preceded by an astonishing change of heart at IMF Central on the wisdom of austerity, with pointed criticism of the UK’s recent economic performance.
I say “astonishing” because for years the IMF has been a byword for austerity economics. Indeed, the IMF as a member of the “troika” is party to continuing severe austerity measures for the deeply troubled economies of the Eurozone – Spain, Greece, Portugal, Italy and, most recently, Cyprus.
This has been widely criticised in these countries for driving their economies ever deeper into recession and thwarting recovery which would help boost tax revenues and reduce those piles of debt. As recently as 2011 Ms Lagarde, with whom Chancellor George Osborne is said to enjoy good relations, backed his plans to slash government spending.
But the IMF has since changed its tune, reflecting a change of guard at the top. The distinguished John Lipsky, former economics guru at Salomon Brothers and who stepped up as acting IMF managing director in the aftermath of the Dominique Strauss-Kahn sex scandal has retired and has been replaced as chief economist by fellow Frenchman Olivier Blanchard, of an altogether more Keynesian frame of mind.
Last month Blanchard warned Osborne that he was “playing with fire” with his fiscal policy and that he should have changed his “austerity” strategy in the Budget. For good measure the IMF unveiled new forecasts showing a sharply weaker outlook for the British economy. It now says Britain’s economy will grow by just 0.7 per cent this year and by 1.5 per cent in 2014 – a reduction of 0.3 percentage points for each year.
Little wonder there may well have been rictus smiles at the Treasury when the IMF team arrived. Having followed what it thought was the IMF’s best advice, they now find themselves berated. Their mood is one of barely suppressed irritation, particularly when the criticism was publicly voiced.
The IMF is certainly not short of ammunition to fire. As recently as February last year the Bank of England was forecasting year-on-year growth of 2.2 per cent for the first three months of this year. In fact the UK economy grew by just 0.3 per cent in the first quarter. For reference, while the IMF’s 2013 forecast is marginally stronger than that of the Office for Budget Responsibility (0.6 per cent), the 2014 forecast is markedly weaker than the OBR’s 1.8 per cent.
Arguably the most glaring weakness is in private sector business investment. This has plunged from 5.8 per cent of GDP in 2007 to just 1.2 per cent last year. As I wrote here last month, investment spending is still 19 per cent down from the peak reached five years ago, a far worse performance than at the same stage of prior recession/recovery cycles. The share of investment in GDP is among the lowest in Europe and the lowest in the G7. Net of depreciation, the ratio of investment to GDP is the lowest for more than 50 years.
And the UK has suffered from continuing problems on bank lending to business. The IMF urged the Bank of England to consider more radical action to kick-start the economy, pointing out that the impact of the Funding for Lending Scheme “has been limited, encouraging mortgage lending more than lending to small and medium-size businesses”. Osborne has since widened the terms of reference for the FLS scheme and extended its duration.
However, the Treasury is not without shots in its locker. While figures from the British Retail Consortium last week showed a 2.2 per cent drop in April – a reminder of the continuing squeeze on household incomes – other pointers such as the PMI surveys for services, manufacturing and construction have been more encouraging. Labour market figures have consistently surprised on the upside. Mortgage lending continues to improve. And house prices are broadly stable.
In short, the latest signs increasingly point to an economy starting to recover – and as for those weak retail sales figures, the wintry weather and the timing of Easter may have played a big part.
The Chancellor’s Achilles’ heel is not so much “austerity economics” as the lack of them. Government borrowing at £120.6 billion is just £0.3bn lower than in 2011-12. Between 2011-12 and 2017-18 government spending will rise from £694bn to £765bn. The “real terms” reduction is just 2.7 per cent over six years. As for overall net debt, this continues to rise and is on course to hit £1,700bn in 2017-18, or three times higher than in 2008. Economic historians will be hard pushed to justify the label “austerity” when looking back on this period.
The problem has been – as always – political: the soft option of cutting capital expenditure where the coalition has only partially restored the cuts of the previous administration. Current spending on vote-sensitive health, welfare and education has been broadly maintained.
The hope is that further monetary relaxation and continued signs of recovery in the second and third quarters will build confidence and encourage business investment. But what remains to be tackled are the structural barriers to activity and recovery, from increased regulatory costs and burdens to employment paper-chasing and planning constraints.
As for Blanchard’s central point – that the pursuit by so many governments of “austerity” economics can only work to depress global recovery – Osborne counters that the priority for deeply indebted countries is still to restore fiscal sustainability. Buckling under now simply piles on the burdens in future years and risks undermining hard-won market confidence.
Treasury officials will do their best to remain polite and avoid biting back. But who could forgive an innocent-sounding question to Mr Blanchard over an informal break for dinner: “Oh, and how are things, Mr Blanchard, back in France?”