Source: Macro News, By: Claire Wilson
The UK is “still a long way from a strong and sustainable recovery” according to the International Monetary Fund, as it concludes its annual review of the British economy.
While the IMF acknowledged improving economic and financial conditions, such as purchasing indicators and sentiment surveys that indicated an uptick in activity, it said percapita income remains 6% below its pre-crisis peak – the weakest recovery in recent years.
Of particular concern to the IMF is the post-war low levels of capital investment as a share of GDP, and youth unemployment.
It said a more diversified, high investment, export-focused economy was required to rebalance the economy, leading to more sustainable long-term growth, the report said.
It said: “Strong growth is needed to restore incomes, ensure the sustainability of public debt, and restore bank balance sheets.”
The complexities of policy reform require a multi-pronged approach, which would benefit not only the UK but also its primary trading partners.
Innovative monetary policy
While the IMF has recommended the Bank of England maintains its looser and innovative monetary policy, it said the transmission of accommodative monetary policy has been weak.
Credit flows remained negative overall and some retail rates, namely for unsecured lending, remained higher than pre-crisis levels.
The BoE’s accommodative stance should be extended, but it required the support of other policy measures to strengthen the banking system, giving monetary policy greater traction.
In addition, the IMF report said while financial sector repair has advanced, it still had concerns over the state of the banks’ health.
Non-performing assets were still too prominent in some major banks, and underlying profitability is weak, the report said.
It called for RBS and Lloyds to be returned into private hands, the two banks together represent two-fifths of the stock of UK net private sector lending.
It said: “Any strategy should seek to return the banks to private hands in a way that maximises the value for taxpayers, strengthens confidence and competition in the sector, and minimizes outward spillovers. In this context, if a sovereign backstop is required to meet a capital shortfall, it should be provided, as this would have a high multiplier.”
The Fund said the UK government needed to bring forward any growth initiatives while preserving the fiscal framework, warning that any fiscal tightening would hinder growth.
“Discretionary measures for this fiscal year amount to £10bn. These will pose headwinds to growth, as expected, coming on top of domestic deleveraging and a weak external outlook, notably at a time when resources in the economy are underutilised,” it said.
Calling the recovery “tepid”, the report said fiscal consolidation was necessary to keep debt levels in check.
“The combination of continuing weak growth and high debt presents a dilemma: further fiscal consolidation will weaken output, with the risk of a permanent loss to productive capacity, while debt will accumulate unless there is consolidation.”
In a counter-move to the government’s Help to Buy scheme, designed to boost activity in the housing market, the IMF suggested fiscal disincentives for holding land without development.
The IMF said further coordination was required between the FPC and the PRA in order to alleviate regulatory uncertainty.
It added that the FPC ought to have additional powers to limit loan-to-value and loan-to-income ratios, which could reduce the risk of property bubbles.
The IMF’s full report on the United Kingdom’s economy is expected to be discussed by the Executive Board in July 2013.