Monday, June 06, 2011
IMF backs Osborne - with strings
Posted by David Smith at 02:00 PM
Category: Thoughts and responses

The International Monetary Fund's Article IV consultation backed the coalition government's fiscal plans, as expected. It says: "The weakness in economic growth and rise in inflation over the last several months was unexpected. This raises the question whether it is time to adjust macroeconomic policies. The answer is no as the deviations are largely temporary. Strong fiscal consolidation is underway and remains essential to achieve a more sustainable budgetary position, thus reducing fiscal risks. The inflation overshoot is driven largely by transitory factors."

Interestingly, snow does not play a part in the IMF's assessment of the recent slowdown: "Growth was flat over the last two quarters, as the inventory cycle—which helped power growth through much of 2010—came to a close and with consumer confidence impaired by spiking commodity prices, a soft housing market, and headwinds from necessary fiscal consolidation."

Growth will be around 1.5% this year, it says, then picking up to 2.5%. The report, while supportive, is littered with warnings. One of which relates to the output gap: "In the more difficult case in which weak growth and high inflation result from a much narrower-than-estimated output gap (which would be indicated by rapid wage growth), policies will have little choice but to tighten to re-anchor inflationary expectations. A narrower output gap would also imply a higher-than-currently-estimated structural deficit and therefore would require further fiscal tightening over the medium term."

The report is here.