By Simon Miller
The International Monetary Fund (IMF) has warned the UK that it needs to prepare a 'plan B' as the recovery stalls.
In its economic update, the IMF said that post-crisis repair and rebalancing of the UK economy was likely to be more prolonged than initially envisaged.
It added: “Confidence is weak and uncertainty is high. Looking ahead, the economy is expected to grow modestly, but with current policy settings, the pace will be insufficient to absorb significant slack in the economy, raising the risk of a permanent loss of productive capacity.”
The fund said more expansionary demand policies would close the output gap faster and recommended further quantatitive easing and even a further cut in the policy cut could be required.
It added that the credit easing measures announced in June were welcomed but may need to be expanded and further public investment should be examined.
The IMF continued: “The planned pace of structural fiscal tightening will need to slow if the recovery fails to take off even after additional monetary stimulus and strong credit easing measures. The UK has the fiscal space to make such adjustments.”
It also said further steps were needed to fortify financial sector stability as “such stability is critical to anchor a strong and durable recovery in the UK and is also of global systemic importance”.
The IMF recommended that bank balance sheets should be strengthened through building capital rather than reducing assets and that “too big to fail” issues should be addressed, including by legislating reforms proposed by the Vickers Commission, resisting pressure to reduce their effectiveness.