The UK is also in the doghouse. Latest data from the ONS shows that the trade deficit more than doubled in August, manufacturing PMIs for August reveal that the sector is still shrinking, the British Chambers of Commerce is in a tizz about falling exports, and now economic growth has been drastically downgraded, from 0.2% growth this year to a 0.4% contraction. Things are at least looking up in 2013, with the IMF forecasting around 1.1% growth, but even that is revised down from 1.4%. If Britain fails to make even these conservative estimates, the IMF has warned that austerity measures must be rethought. ‘If growth should fall significantly below current projections, countries with room for manoeuvre should smooth their planned adjustment over 2013 and beyond,’ said the IMF, wagging a finger at the UK.
This will be a tough pill for George Osborne to swallow. The IMF originally gave his fiscal Plan A its full support and this pronouncement will further shake confidence in his ‘save, don’t spend’ strategy.
A statement from the UK Treasury insists that there’s still life in fiscal austerity yet, however: ‘The IMF repeat their advice that the first line of defence against this should be to allow the automatic stabilisers to operate, monetary policy easing and measures to ease the flow of credit – all of which the UK is doing,’ reads the release.
Ah, yes. But the IMF has also criticised the fiscal multipliers used by government economists – the equations used to assess the impact of fiscal cutbacks. Governments have been working on the premise that the fiscal multipliers stand at about 0.5 – for every £1 lost in government spending, 50p would be slashed from GDP. But that’s too generous, says the IMF. In fact, ‘multipliers have actually been in the 0.9 to 1.7 range since the great recession,’ it says.
All in all, the outlook is pretty bleak. The US is a real danger zone: its economy could fall off the fiscal cliff next year, once the spending cuts and tax hikes kick in, and this will have a serious impact on the rest of the global economy. But we do at least now have the European Stability Mechanism to help reduce the cost of government borrowing across the eurozone. As for the UK, the PM has insisted we’re actually not doing too badly. ‘We have created a million new jobs and are now a net exporter of cars!’ David Cameron told the BBC this morning. Let’s hope that will be enough to drive us out of this recessionary ditch.