News Column

Analysis Praise plus get-out clauses

June 7, 2014

Larry Elliott



Christine likes George. And George likes Christine. The International Monetary Fund is back with the programme, once again giving its full-throated backing to the government's economic policy. Not a mention of "playing with fire" or calls for higher public spending on infrastructure projects. All is well with the world.

Or is it? Examination of the IMF's annual report on the state of the UK economy shows Christine Lagarde has two big concerns. The first is about the weakness of productivity, which the IMF fears will derail the recovery unless it starts to pick up. The second, more immediate, threat comes from the housing market, where rising prices are leaving more and more people vulnerable to higher interest rates.

And the day when borrowing costs need to rise is coming closer, the IMF says. Its report on Britain says that the emergency 0.5% bank rate should stay in place "for now", while Lagarde said at a Treasury-hosted press conference that keeping interest rates low could fuel house price increases.

So, while the IMF had some nice things to say about the UK recovery becoming better balanced, it is leaving its options open just in case what has happened over the past year or so turns out to be short-lived. Based on the evidence of history, these are well-founded concerns.

Britain has tended to be an inflation-prone economy, and persistent weakness in productivity would mean that a continuation of growth at current levels would pretty rapidly lead to the economy running up against capacity constraints. Inflation will start rising, the Bank of England will slam on the brakes and the recovery will stall.

Boom-busts in the property market have been another big feature of the past four decades. An abundance of cheap money leads to higher demand for housing, rising prices, irrational exuberance, excessive debt, policy tightening and a property crash - usually in that order. The IMF does not think this is a credit bubble yet, but is worried that that may be the eventual outcome.

The warning to the Treasury and the Bank on housing was pointed. Action is needed now to head off the risks of another boom-bust. That should start with the meeting of the Bank's financial policy committee the week after next, the IMF made clear. In the first instance, it would like to see limits on the number of high loan-to-income (LTI) mortages. If that proves insufficient, it thinks outright caps on LTIs and on loan-to-value ratios should be considered. It also politely suggested to Osborne that he might want to rein in the mortgage subsidies offered under Help to Buy, and think about whether the scheme really needs to run for its full three years.

The IMF's yearly health check was, therefore, a bit more nuanced than it might have looked. Britain is not top of the IMF's list of immediate concerns; a hard landing in China and deflation in the eurozone are seen as more pressing risks. But the IMF has put down important markers so that in the event that things go pear-shaped it can say: we told you so.



For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Guardian (UK)


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters