Page last updated at 15:39 GMT, Wednesday, 20 May 2009 16:39 UK

IMF praise for UK recession plan

By Steve Schifferes
Economics reporter, BBC News

Alistair Darling
Mr Darling is sticking to his economic forecasts.

The UK government response to the global financial crisis has been "bold and wide-ranging," the International Monetary Fund (IMF) has said.

It added that "aggressive action" by the government succeeded in containing the crisis and avoiding a breakdown.

But it warned that high levels of household and bank debt meant the pace of any recovery was still uncertain.

And it urged the government to adopt more ambitious plans to reduce the huge scale of government borrowing.

It remains to be seen whether the recent efforts to recapitalise the banks will be sufficient to sustain credit provision at a level required for a robust economic recovery

The IMF is sticking to its forecast that UK GDP will decline by 4.1% this year, compared with the chancellor's forecast of about 3.5%.

It said that the UK economy would contract at a decelerating rate in the near-term, but that the financial system was "still under stress" and that the UK economy remained "susceptible to potential shocks", with the sharp increase in public sector borrowing one of the key vulnerabilities.

"It remains to be seen whether the recent efforts to recapitalise the banks will be sufficient to sustain credit provision at a level required for a robust economic recovery," it added.

In response, the Treasury said it noted "the scale of the challenges" and accepted that "restoring the flow of credit to the economy will be crucial to building and supporting the recovery".

Vulnerable consumers

The IMF also noted that consumers were unlikely to return to their high-spending ways any time soon.

"Faced with falling house prices, significant reductions in the value of pensions and other assets, a deteriorating and uncertain employment outlook, consumers are likely to retrench spending to reduce debt and rebuild savings," it warned.

It said the speed and strength of the recovery was highly uncertain, "given the unprecedented nature of the crisis and the importance of confidence effects".

The IMF added that the depreciation of the pound could aid the recovery by shifting demand to domestically produced goods and services.

But it said that the UK had a "particular exposure" to global shocks because of its large financial sector, overheated property markets, high household indebtedness, and strong cross-border links.

And it warned that there was a need for "greater international coordination" in the event of a crisis involving a major international bank with strong cross-border links.

Andrew Smith, chief economist at KPMG, said the IMF was "right to be cautious in its outlook for the UK economy."

"Distressed consumers may prefer to save and pay down debt and businesses are in no mood or position to invest, so continued expansionary fiscal and monetary policy will be necessary to underpin demand," he added.

Public borrowing

The IMF wants the chancellor to spell out in more detail how he intends to return the public finances to a sustainable downward path.

It suggested that spending cuts were "more durable" than tax rises in reducing public borrowing over the long term, and said that a "broad public consensus" was needed on making a "sizeable fiscal adjustment".

But Robert Chote, the director of the independent Institute for Fiscal Studies, said that "experienced Whitehall hands fear it will be very difficult to achieve even the spending plans in the Budget, let alone more ambitious ones" and it will be difficult for the next government to avoid raising taxes.

The IMF also urged the Bank of England to expand its programme of credit easing by purchasing more private sector debt, as opposed to its current focus on buying up government debt.

But it warned that "at a more fundamental level, the public's confidence in the Bank of England's operational independence remains contingent on the state of the public finances."

Meanwhile Mr Darling re-affirmed his growth forecast and said in a newspaper interview that he still expected to economy to begin to recover by the end of the year.

"I am not going to change my forecast. I remain confident that the we will see a return to growth by the end of the year," he said.

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