IMF verdict on the UK economy: the good, the bad, and the ugly

The International Monetary Fund published its long-awaited Ofsted report on the UK economy this afternoon. As usual, the written assessment contains enough to keep everyone on all sides of the debate happy, but while avoiding telling the government to abandon Plan A, it does instruct George Osborne to invest in supply-side measures to boost growth, warning that ‘planned fiscal tightening will be a drag on growth’. Here’s a summary of the good bits from the IMF’s concluding statement, the awkward bits, and the downright bad news.

You can read the full concluding statement here.

The Good

• The Government’s ‘essential’ plan for cutting the deficit has earned it credibility, the IMF said. But it also praised ‘welcome flexibility in its fiscal program’, which is a positive way of pointing out that ministers aren’t exactly rigidly sticking to Plan A anyway.
• There has been ‘some improvement in economic and financial conditions’.
• The IMF was impressed with monetary policy, which it said was ‘vigorous and appropriate’. It praised a number of Bank of England initiatives, and the new monetary policy remit announced in the 2013 Budget.

The Bad

• The IMF warned that ‘the prospect remains for weak growth’ and that the UK is a ‘long way’ from a sustainable recovery.
• The banks are not yet functioning healthily. The report said:
  

  ‘However, the share of non-performing assets across some major banks remains at elevated levels, and underlying profitability is weak. Moreover, there are concerns pertaining to lender forbearance, under-provisioning for risky assets and conduct costs, and aggressive use of risk-weights.’

• The report recommended a ‘clear strategy’ for RBS and Lloyds, which George Osborne agreed with when he responded to the judgement this morning. It also said the success of banking reforms in general depended on international efforts.
• While the IMF was impressed with the monetary policy response, it warned this was not having as much of an effect on the ground. The report said:

‘The transmission of accommodative monetary policy has, however, been weak. Credit flows remain negative overall and some retail rates – notably for unsecured lending – remain higher than before the onset of the crisis.’

The Ugly

• The line you’ll hear repeated over and over again today from Ed Balls and Co is ‘planned fiscal tightening will be a drag on growth’. The report said:

‘Discretionary measures for this fiscal year amount to £10 billion. 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 underutilized.’

• The IMF also said weak growth and high debt combined left the government with a dilemma where further cuts would weaken output but failing to cut would increase debt. The solution is to pursue ‘measures that address supply-side constraints and also provide near-term support for the economy. In the current context in which labor is under-utilised and funding costs are cheap, the net returns from such measures are likely to be particularly favorable.’

  But it also recommended bringing forward planned capital investment, public guarantees, changing the detail of consolidation. That detail might include reducing marginal effective corporate tax rates, tax allowances for raising equity, reform of property taxes and broadening the VAT base.

• The Help to Buy scheme comes under attack again, with a warning that it will raise house prices rather than improve access to housing. The IMF recommends penalties for land banking to mitigate this.
• Like all IMF reports, a great deal of translation of carefully-worded phrases is needed. For instance, ‘near-term support for the economy’ is a very gentle and sensitive way of saying that the Treasury needs to consider stimulus. ‘Stimulus’ isn’t a word Osborne wants to read. But it’s there under another name.

Politically, this could have been a great deal worse. The report does contain some awkward home truths for the Treasury. But it doesn’t, as some predicted, instruct George Osborne to abandon Plan A and it does acknowledge that there are green shoots. It represents a softening from Olivier Blanchard’s comments on austerity in April. As with all IMF judgements, though, there’s still plenty to scrap over.