The IMF yesterday offered a cautiously positive verdict on the handling of the financial crisis by the Government and the Bank of England.
In its latest review of the UK, the fund said that the authorities had "set the stage for a sustainable recovery" by taking "bold and wide-ranging" measures that had averted "systemic breakdown" – but warned that more political consensus is needed to repair the public finances, and that the recovery will be stymied by high consumer debt, which is especially high by international standards. "The high level of household indebtedness constrains the pace of economic recovery. Faced with falling house prices, significant reductions in the value of pensions and other financial assets, a deteriorating and uncertain employment outlook, and reduced access to credit, consumers are likely to retrench spending to reduce debt and rebuild savings."
The fund added: "Fiscal commitments would be strengthened by targeting a more ambitious medium-term fiscal adjustment path for implementation once the economic recovery is established. The focus of this adjustment profile should be to put public debt on a firmly downward path faster than envisaged in the 2009 Budget."
The IMF called on the Government to encourage the banks to limit their dividends to help conserve capital, which in turn would support lending.
The Bank of England, meanwhile, should press on with its policy of "quantitative easing", where "initial results have been moderately encouraging... But it is too early to tell whether these effects will be strong and durable enough."
Reflecting the IMF's view, the president of the World Bank, Robert Zoellick, added that the world recession may be easing: "I hope so in terms of financial markets. I believe globally we are likely to see the rate of decline lessen."
The IMF's report came as the minutes of the last meeting of the Bank's Monetary Policy Committee underlined the unsteadiness of the economy. Surprising weakness in activity in the first months of the year pushed the MPC into unanimously agreeing to extend the policy of quantitative easing by £50bn. Some argued for a larger cash injection of £75bn, using up the £150bn initially agreed with the Government in March.
The minutes strongly hinted that the Bank could indeed go further with its policy, beyond the £150bn allocation. "The risks of stimulating demand too little at the current time seemed greater than the risks of stimulating it too much," they noted. "If the recovery faltered, then policymakers might find that their ability to stimulate demand in the face of receding confidence would be impaired.
"But if inflation were to rise more rapidly than expected and appeared likely to breach the inflation target on the upside, then monetary policy could be tightened through some combination of raising Bank Rate and selling assets back to the market."
Continuing doubts about recovery persist at Threadneedle Street, despite some hopeful signs such as the Bank's own Agents' Survey, and the latest CBI Industrial Trends Survey, which were both out yesterday. The Agents' Survey noted that "while credit conditions remained tight, some contacts felt that the major British banks' appetite for lending had increased a little".
The CBI also offered tentative evidence that the worst may be over for manufacturing, if only because "destocking", where retailers sell from stock rather than placing new orders at factories, is starting to ease off.