THE UNITED Kingdom and other major countries should be slow to withdraw stimulus packages before “firm evidence” exists of economic recovery, the International Monetary Fund said.
“Unwinding the vast web of domestic and international crisis financial measures should be done gradually and cautiously, and may take a considerable period of time,” the Washington-based body said.
The IMF’s chief economist, Olivier Blanchard, warned euro zone countries, who cannot devalue their currencies, that cutbacks will be “extremely painful” and could take up to 20 years.
“The adjustment is easier for countries that can devalue their currency. In countries that do not have this option . . . the tightening will be extremely painful,” Mr Blanchard told Italian newspaper La Repubblica.
The IMF verdict on economic stimulus was warmly greeted by British chancellor Alistair Darling, who has committed to cutting the UK’s annual borrowing in half in five years, but who wants to delay the beginning of cuts until 2012.
“It is further evidence that David Cameron and George Osborne have neither the experience nor the judgment to be trusted with the economy,” he said.
“In general, fiscal and monetary stimulus may need to be maintained well into 2010 for a majority of the world’s economies, including several of the largest, although the timing of the exit is likely to differ substantially across countries,” the IMF went on.
“One of the key lessons from experiences of similar crises is that a premature withdrawal of policy stimulus can be very costly.”
Before the credit crisis, four in 10 countries were running budget surpluses, it said, but this number plummeted to just one in 10 two years later. The number of countries with deficits higher than 3 per cent had risen to seven in 10 from just two in 10.
The latest statistics from the British Bankers Association showed that mortgage lending in January fell to the lowest level for eight years, while the number of house sales halved in the month.
Bank of England governor Mervyn King warned that the bank might have to restart quantitative easing – the purchase of British government bonds with newly minted money – if the economy slides in coming months. “My particular concern at the moment derives from the health of the global economy, and in particular our major trading partner, the euro zone,” Mr King said.
A key deputy of Mr King, Paul Tucker, said it would not be until 2012 before anyone knew whether the recovery would be strong enough to absorb excess capacity in the system.
