IMF shows us a dark future
This goes to the very heart of the wor;d’s - and especially Britain’s - dilemma as we face the need to claw our way painfully out of the crisis.
I highlight the essential dilemma which any British government must face. And note, both alternatives are exceeding unpleasant. .
Christina
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1.10.09
1. Britain's £215bn-a-year funding gap the worst in the world, says IMF
Britain is facing a more severe credit crunch than any other country in the developed world, the International Monetary Fund said yesterday.
By Edmund Conway in Istanbul
The UK faces a so-called annual "financing gap" of £215bn – 15pc of gross domestic product – this year and next between what people need to borrow to keep the economy in good health and what they actually can lay their hands on.
This compares with a gap of a mere 2.4pc in the US and 3pc in the eurozone. The Fund, presenting its closely-watched Global Financial Stability Report, also indicated that the Bank of England would have to persevere with its radical Quantitative Easing (QE) programme for much longer in order to compensate for the debt famine.
Although the IMF presented its most upbeat assessment of the world's financial system since the onset of the crisis, declaring that the world was now "on the road to recovery", it said the UK is "most susceptible to credit constraints... given its significant reliance on the banking channel and the projected sharp decline in domestic bank balance sheets, as well as substantial public financing needs."
Jose Viñals, lead author of the report, said: "That means that either there is continuing support on the part of the authorities to underpin the credit process or there will be high lending interest rates and credit will be constrained".
The warning underlines why the Bank's Monetary Policy Committee has committed to a far bigger QE programme than any other major central bank, as it battles the deflationary forces conjured up by this lending shortage.
In a speech in Belfast, new MPC member David Miles said QE "is having an impact that is relevant to economic conditions right across the country... not just in financial markets but in high streets and factories and homes throughout the UK."
The IMF's calculations will undermine many economists' assumptions that the Bank will soon end its QE scheme.
In a further blow to the UK in particular, the Fund said that Britain and the US are exposed to "home bias" - the likelihood that investors from around the world choose to withdraw their cash.
The report said: "Over the past decade, mature market economies running significant fiscal deficits have been able to limit increases in domestic interest rates by tapping foreign savings from emerging market central banks, oil exporters, and sovereign wealth funds. If foreign investors become concerned about long-term fiscal sustainability in these countries, interest rates on government securities would need to adjust higher and the exchange rate would depreciate."
The Fund reduced its estimate of losses derived from the global financial crisis from $4 trillion (£2.5 trillion) to $3.4 trillion, saying that the improvement was due largely to the sharp increases in asset and equity prices around the world over the past six months.
However, it said that losses facing banks specifically, as opposed to the broader financial system, remained unchanged at $2.8 trillion, of which more than half still has yet to be recognised.
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2. Gordon Brown's pat on the back from the IMF is followed by a very hard kick
By Jeremy Warner
There’s good and bad news for Gordon Brown’s beleaguered UK government in the IMF’s latest “World Economic Outlook” (WEO).
The good news is that the IMF has revised up its growth forecast for next year by almost one percentage point. Unfortunately, the 0.9 per cent growth rate now predicted is still quite quite a bit lower that the UK Treasury’s forecast of 1.25 per cent. The IMF has also slightly increased its forecast of the size of the contraction this year to 4.4 per cent.
Yet perhaps the more important point for a Government desperate for independent validation of its policy approach to the downturn is that the IMF supports the idea that the fiscal stimulus needs to be continued or even amplified for some time yet until the recovery is on a firmer footing.
The Conservatives, it will be recalled, want an immediate fiscal tightening to address the road crash in the public finances. So that’s another slight plus for Alistair Darling, the Chancellor.
The bad news is that the IMF expects the recovery to be slow for some time and insufficient to decrease unemployment. What’s more, the forces driving the current rebound are said to be partly temporary in nature and likely to diminish during the course of next year.
Building on yesterday’s analysis in the IMF’s “Global Financial Stability Report”, the authors of the WEO say that the key constraint on the pace of recovery will be limits on credit availability. Credit growth will continue to fall or stay at very low levels, the IMF says, and this will hold back investment.
The WEO also predicts that consumption will be particularly weak in advanced economies, especially those that experienced credit booms, housing bubbles, and large current account deficits, “such as the United States and the United Kingdom”.
Oh dear. The Government gets a little praise for the policy response, but by implication is roundly blamed for allowing the credit boom and housing bubble to build up in the first place. Correcting these errors will crimp growth for years to come, the IMF implies, while getting the timing right in withdrawing exceptional fiscal, monetary and financial system support is going to prove exceptionally difficult.
The Government is urged to set out a clear framework for such withdrawal.
UPDATE: 8.59 am
The IMF’s chief economist, Olivier Blanchard, has just been putting more flesh on the bone at a press conference to launch the World Economic Outlook here in Istanbul, where the IMF is holding its annual meeting. Again, his remarks do not make for pleasant listening.
Countries are urged to delay fiscal consolidation until the recovery is on a firmer footing, but eventually a vicious squeeze will need to be imposed, Mr Blanchard warns. This is going to require a great deal more than a new set of fiscal rules. Root and branch structural reform to address high levels of public endebtedness will become a priority.
What does Mr Blanchard mean by structural reform? Essentially he’s referring to reduced benefit entitlement, particularly pensions and healthcare. Retirement ages are going to have to rise and the costs to the public purse of healthcare will have to be constrained. Who in their right mind would go into an election on such a platform?
Of course, Mr Blanchard wasn’t referring just to Britain, but to all advanced economies with burgeoning fiscal deficits and national debts swelling to 100 per cent or more of GDP. Yet his remarks have particularly relevance to Britain, where the pace of deterioration in the public finances is more rapid than elsewhere in the G7. Even the Tories, who propose a more immediate fiscal consolidation than Labour and have referred to the need for structural reform to achieve it, have steered clear of spelling out the implications in such stark terms. It may require a fiscal crisis, whereby markets refuse to fund government borrowing on present, relatively benign terms, to drive through such reforms, Mr Blanchard observes. [This is what I continually warn of but the remedy conflicts with the IMF’s urge to continue fiscal stimulus. You can’t do both and that is the essential dilemma for Britain -cs]
UPDATE: 915 am
The IMF has long sought the holy grail of a more balanced world economy, with the US and other big deficit nations saving more and China upping its consumption. Now it is happening, though not in the manner “we would have dreamed of”, Mr Blanchard remarks. The recession has already done half the necessary work in correcting these imbalances, but we are still “stuck in the middle of the river”.
Even so, Mr Blanchard was optimistic that this time we would reach the other side and that a more balanced global economy would emerge from the torrent. The crisis was forcing surplus countries to rethink their export- led growth models, while deficit nations knew that with internal demand now depressed by constrained credit and higher savings, they would need to rely more on exports to support growth.
All very logical, only as Mr Blanchard admits, there’s one obvious flaw. Not all countries can have export led growth. Instead, he suggests, big surplus nations are just going to have to accept smaller, more reasonable surpluses. Currency adjustment would be one of the main mechanisms for accelerating these changes
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