IMF Gives Stark Warning To UK Over Eurozone
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 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%.
what do you think?
Yeeee haar, YES ! they've recommended dropping interest rates to less than 0.5% !!!! Come on !!! PLEASE let this happen. This will help businesses & young families, which in turn will help the economy grow !!
Artifically low interest rates cannot be sustained. The market will bounce back.
Believe me, nothing will bounce anywhere until this repressive tax regime and the mindset that caused it are consigned to history.
The relationship between Base rate and rates Banks charge has broken down precisely because Base Rate is being artificially held down. That's why you can earn more than 3% on savings, mortgage rates are 4.5% plus if you strip out the discounts used for the first couple of years, and Business Loans are difficult to get and at much higher rates again. So how will dropping Base rate from 0.5% to ?? help in any way. Only fools who don't understand it think it will. And all the IMF do is predict economic growth rates, then revise them every time they get them wrong, which ios most of the time, to give the illusion they know what they are doing
No it won't Grant!!!
Cameron et al have been taking more and more blood from a sick patient and can't understand why he is not getting better. Doh! With 85% of British businesses still failing to grow you would think they would have caught on that austerity is killing demand. But no, this bunch of incompetents have to be told by a foreigner how to run their own country! Taxes must be reduced, especially VAT, and in many cases abolished altogether so that we can build our way out of this depression.
Yes, excessive and inflationary taxation is strangling growth. Osborne is so dim that he cannot see that higher taxes on petrol and diesel are pushing up costs and the cost ofliving, while the increased air passenger duty makes the UK an even more expensive destination for holidaymakers and business people. Increased VAT is probably a case of more meaning less revenue.
That's a fact. But perhaps Cameron will listen to an outsider when he won't be told by his own people.
Madam Lagard as former French Finance Minister was responsible for the french banking system (which is parlty controlled by the State) being hugely exposed to Greece, Spain and Italy. What she is saying here is borrow even more to create an economic suger rush - thanks but no thanks Christine, been there, done that, didn't work except increase the debt.
I believe she is actually hinting at more "quantitive easing".
So Ed Balls thinks we should borrow more to get out of trouble ,its him and his socialist cronies who got us into this mess . no thanks Ed , climb back under your stone
John Busby....I voted for the tories, John, but I'm not going to blind myself to what is happening NOW, not what happened almost 4 years ago. When David Cameron took over, (dont bother with Clegg), we had debts of 100 billion. Now, 2 years later, we have debts of 150 billion! We ARE still borrowing, John, because, sadly, nobody knows how else to deal with the international crisis we are part of. We have to stop kidding ourselves that the situation the world in general, and Britain in particular, is in, is because of what was done years ago in the UK. It's because of what is happening now! Greece, Spain, Italy, and Ireland are absorbing the reserves of all their fellow EU members like sponges. Somehow it has to stop.
B.a.l.l.s E.D remember the country in the hands of the 3 B s. Christine butt out but no thanks. What's left, oh yes! does anybody care anymore???
Yes Barry, and it's got worse since the 'Calamity Cs' have taken over! When Labour left office the economy was growing and unemployment was falling... FACT! Now, we've gone into a 'Tory Double-Dipper' and it's authors are the incompetant duo of Dastardly Dave & Boy-George!!
The Keynesian economic model is failing. Every article I read seems to show that Friedrich Hayek was right. If you don't know who HAYEK is, then please research his Economic theories.
Georgie Porgie, it's time to do what you said you would never do... Time to think about a Plan B, for when the manure really hits the turbo-charged fan!
Let's just continue to throw billions into a bottomless pit, eh? Greece, Italy, Spain, anyone want a stab at guessing who is next. The Germans have got it right this time, enough is enough. As an aside, we have spent £9 billion (at a conservative estimate), which we do NOT have, on the Olympic games, madness in our current economic crisis.
Brian E Gorton
What did that Great USA Pres do in the great depression.I am sure he did something.
This is possibly the best indication yet that we should get out of the European Union! The Germans have, once again, tried hard to make the UK subservient to them - something that their activities in the first half of the 20th Century failed to do! Scrap the EU and bring back EFTA (European Free Trade Area), and the Commonwealth!!
I know we try to blame Gordon for all the current woes as though it were a personal problem. Its strange that now people are saying its not the governments fault its an international problem. It always was. I suppose the press did not like Gordon that is all.To get out of the present mess we have got to work together the Tory idea of taking away workers rights is just plain daft. But it could work if in return the finance houses were each fined Billions a year for not investing in British industry and all TAX payers where put on PAYE including the self employed.
How can interest rates be cut? Base Rate is already toooo low and not benifitting anybody. It's all smoke and mirrors. Why do you think mortgages rates are going up....?