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IMF report on UK
The IMF’s report on the state of the UK economy (issued following annual discussion with the government) stresses the country’s vulnerability to risks:
If there was a renewed and abrupt loss of confidence, possibly triggered from outside the UK, it could spark further financial sector instability, undermine faith in fiscal sustainability and unhinge inflation expectations, thus disrupting domestic and external stability. Although the probability of such a crisis is low, its impact could be substantial
In other words, it will probably be OK, but if it goes wrong, it is likely to go really badly wrong. This is not very encouraging as the IMF also expects recovery in the UK to be gradual. So the prospect is for a gradual recovery with a risk of another severe downturn.
Another source of concern identified by the report is the weakness of public sector finances, especially the high level that government debt is likely to reach by the end of the recessions. The position is considerably worsened by contingent liabilities that the government has regarding bailed-out banks, and the addition to public sector borrowing of nationalised banks.
The contingent liabilities have reached over £900bn — 63% of GDP. Although this is much more than the government is likely to actually pay, it is still an uncomfortably large amount to have guaranteed.
The IMF also strongly endorsed the independence of the Bank of England, possibly wishing to shore it up with moral support at a time when it is very tempting for the government to withdraw it for the political gains it could reap from a more short term economic policy.
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