Recession is nearly over but recovery is fragile, says IMF

Economics Editor,Sean O'Grady
Sunday 23 October 2011 03:04

The world economy is "on the verge of recovery", having experienced its first decline since the end of the Second World War, according to the International Monetary Fund.

"The advanced economies, hit particularly hard by financial crises and the collapse in world trade, are showing signs of stabilisation, driven mainly by an unprecedented public policy response," the IMF said in its latest World Economic Outlook report.

The recession in Britain, too, is set to end soon, the IMF said as it upgraded its forecast for growth next year. "Real GDP is expected to turn positive in the second half of 2009, as the real estate and financial markets stabilise and weakened sterling supports net exports." However, the IMF warns of "further large declines" in house prices of anything up to 12 per cent. Unemployment, too, will rise to about 3 million – "a slow and tepid pick-up in job creation".

The fund urges governments to carry on supporting their economies. "Premature exit from accommodative monetary and fiscal policies, possibly driven by rising concerns about government intervention and unconventional action by central banks, seems to be a significant risk, because the policy-induced rebound could be mistaken for the beginning of a strong recovery," it said.

Olivier Blanchard, the IMF's chief economist, said that signs of improvement "should not fool governments that the crisis is over.... For the moment, the recovery is largely accounted for by strong public spending and inventory adjustment by firms. A sustained recovery will require rebalancing of demand at two margins – first, from public to private demand and second, from current account surplus countries to current account deficit countries."

Britain will grow by 0.9 per cent next year, according to IMF economists, up from a forecast of 0.2 per cent made in July. That remains towards the bottom of the advanced economies' growth league table, though not so far from the Chancellor's forecast of 1.25 per cent. However, the projection for this year was still downgraded, to a decline of 4.4 per cent in GDP, down 0.2 per cent. Thus, 2009 will go down as the worst year for the British economy since the early 1930s.

World growth, says the IMF, will return to 3.1 per cent in 2010, after a contraction of 1.1 per cent this year, better than the 1.4 per cent drop suggested in July. The IMF talks about a "resurgence" in Asia, most notably in China and India, fuelled by "policy stimulus and a turn in the global manufacturing cycle". In contrast to the West's "sluggish" performance, China and India are predicted to grow by 9 and 6.4 per cent respectively next year. America will rebound to expand by 1.5 per cent next year, as elsewhere the product of unprecedented official action. But there seems little chance of a rapid return to American economic leadership: "Growth is likely to fall below 2 per cent for a considerable time."

Echoing concerns at the G20 summit in Pittsburgh that government and central bank economic support must only be withdrawn when "the recovery is secured", the IMF in effect gives a green light to large budget deficits and continued low interest rates and more quantitative easing. "The policy stance in the advanced economies should continue to support demand until the recovery gains a much stronger foothold. Against this background there is ample room to maintain very low interest rates and use unconventional instruments to counter adverse feedback loops between the real and financial sectors. However, as the recovery takes hold a careful exit needs to be engineered. Discretionary fiscal stimulus should not be withdrawn too early."

The IMF is more downbeat on unemployment in America and Britain because "the employment losses in the UK and US reflect that they have suffered not only recessions but also housing busts and systemic financial crises. Such a combination generally leads to large output drops and significantly delays recovery, suggesting a slow and tepid pick-up in job creation for these two economies".

Credit where credit's due: Corporate lending up

Credit conditions are finally improving for businesses, but consumers still face tough times accessing lending, the Bank of England said yesterday.

Improvements in the cost and availability of funds to banks contributed to easing corporate lending over the last three months, and the increases are expected to continue into the fourth quarter, the Bank's credit conditions survey shows. And although the availability of mortgage lending to households reduced slightly in the last quarter, the situation is expected to improve. But unsecured consumer credit continued to decline in the third quarter, with further falls to come.

The findings boost hopes that the Bank's quantitative easing programme is starting to filter through, but does not rule out further injections, Howard Archer, the chief UK economist at IHS Global Insight, said. "The survey raises hopes that credit conditions will increasingly become less of a constraint on economic activity over the coming months," he said. "This is critical to sustainable recovery prospects."

Yesterday also saw similarly muted figures from other parts of the economy. Construction orders fell by another 4 per cent in the three months to August, taking the year-to-date down by 23 per cent, the Office of National Statistics said. Orders for private housing were 22 per cent lower in the third quarter, but public housing orders jumped by 52 per cent.

The manufacturing purchasing managers' index (PMI) for September was also disappointing. Both output and new orders expanded for a third successive month, but at a slower rate, increasing concerns of a double-dip return to recession.

Sarah Arnott

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