Reuters reported today (17 July 2009)that the British economy continues to be fragile.The timely advice from the IMF to Britons-reduce borrowing when recovery reach your door-steps or else....
The IMF projected that the British economy will shrink sharply in 2009 before edging into growth in 2010. As such, the government should plan to reduce borrowing when recovery comes.
In its annual review of the British economy, the IMF said the country had succeeded in averting a financial meltdown, but now needed to focus on ensuring public borrowing did not get out of control during its deepest recession in decades.
"Market conditions so far suggest the UK is getting the benefit of the doubt. But this benefit of the doubt will not last forever." the IMF cautioned.
IMF forecast Britain's economy will shrink 4.2 per cent this year before recovering to grow a wee 0.2 per cent in 2010, unchanged from forecasts released earlier this month.
"The economic outlook is highly uncertain. Recent indicators suggest that economic activity has begun to stabilise. However, the recovery is likely to be slow and subdued as banks and households go through a difficult balance sheet adjustment," the IMF said.
The global economic watchdog's forecasts are gloomier than government projections of 3.25 per cent to 3.75 per cent contraction in 2009 followed by 1.0 per cent to 1.5 per cent growth in 2010, and it identified soaring government debt as a major vulnerability.
Borrowing was likely to be equivalent to around 13 per cent of GDP in 2009 and 2010, with total debt approaching 100 per cent of GDP over the next five years.
"The success of the current policy package depends on continued trust in the sustainability of the fiscal position. A strong commitment to reverse the sharp deterioration of the public finances once the economic recovery has been established ... will be essential," the IMF said.
"Credibility would be enhanced by specifying concrete expenditure and revenue measures to achieve the desired adjustment," it added.
The Treasury said it already planned to halve the budget deficit over the next four years and bring down borrowing in the medium term.
Figures out yesterday showed that government departments have underspent by a total of £15 billion (RM87 billion) in 2008-09. taking their end-year flexibility total to £20 billion.
The Treasury could either sanction departments to spend this money if they wished or use to fund other projects or par down the deficit.
With a general election less than a year away, MPs are loath to say what cuts and tax rises they would have to implement to pay back debt, while all the main parties have accused each other of misleading the public about their plans.
The IMF said the Bank of England's monetary policy — which has seen interest rates slashed to 0.5 per cent — was appropriate, but that it was too soon to judge the effectiveness of its £125 billion quantitative easing policy.
Given economic weakness, the IMF said it expected inflation to stay low for an extended period.
It also called for the Bank of England to buy a wider range of private sector assets, which currently amount to less than 3 per cent of its total purchases, as the majority of funds have been spent on buying government debt.
Asset-backed commercial paper, which the Bank is already considering, and syndicated corporate loans would be good additions to the Bank's purchases, the report said.
The IMF also welcomed recent government proposals for financial regulation reform, but warned that the government may have to dig into its coffers to help banks out again as the recession threatened asset quality and capital buffers.
"These lingering uncertainties are restraining lending growth," the IMF said.
"Authorities should encourage banks to strengthen their capital base and explore options to improve capital structures. The authorities should also continue their contingency planning, and ... should be prepared to provide further public capital, if needed," it said.
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