From the TUC

OECD and IMF start worrying about austerity

12 Jul 2010, by in Economics

The Coalition’s confidence that the rest of the world shares their commitment to cuts has taken a battering with the publication of new reports from the Organisation for Economic Co-operation and Development and the International Monetary Fund. In particular, the Office for Budget Responsibility’s growth and employment forecasts are seriously undermined.

The latest edition of the OECD Economic Outlook warns that global recovery may be slower than expected and cautions against the UK’s decision to cut back on employment programmes. The IMF’s Economic Outlook – Update expresses their caution about taking cuts too far in its subtitle: “Restoring Confidence Without Harming Recovery.”

International organisations like the OECD and IMF are accountable to national governments, so their scope for criticism is always limited. I have already reported on how the communiqué from the recent G20 summit was written to make sure that every government could tell its electors it had achieved a victory in Toronto and there are elements of that in the work of the IMF and OECD. But both have a reputation for being rather more independent in their economic analysis, and their worry that fiscal retrenchment across the developed world could cut off the recovery is very plain.

The OECD:

Both organisations are worried about sovereign debt and fear losing the confidence of money markets (what Paul Krugman calls “invisible bond vigilantes”) but they are also worried that the global recovery may be about to falter – at least in the richer countries. The OECD writes that “the recovery is unlikely to be sufficiently vigorous to reabsorb rapidly the current high levels of unemployment and underemployment.” They emphasise the need for cost effective employment programmes but “a strong case can be made to ensure that labour market programmes remain adequately funded.”

The OECD’s commentary on the UK is tougher than usual – the period just after an election, when the new government will take all criticisms as directed against their predecessors, is just about the only time when OECD economists can be relatively free in their criticisms. The Organisation reports that “youth and low-skilled workers have been particularly affected by the deteriorating labour market in the United Kingdom” and that other countries have experienced smaller reductions in employment despite suffering larger drops in output. The outlook for unemployment is bleak and the OECD predicts “the economic recovery will be too muted to result in strong job creation and that unemployment is likely to recede only slowly.”

The comments on labour market policy are unusually sharp. There is praise for the last government’s programmes for youth, and criticism of the replacement, together with concern about the way Jobcentre Plus is being stretched – all lines the new government will have tried to keep out of the report:

Effective re-employment assistance has prevented an even sharper increase in UK joblessness and should be reinforced even in the current context of fiscal consolidation. One of the reasons the UK labour market has weathered the recession relatively well is that unemployed job seekers have been better able than their counterparts in past recessions to find new jobs. This probably reflects the progressive improvement of the activation strategy – the combination of income support, job-search requirements and effective re-employment services – in force in the UK. The introduction of the Flexible New Deal (FND) in October 2009 has been useful in the context of the recession because it puts an increased focus on screening skills at an early stage of the unemployment spell, targeting the low-skilled unemployed who are likely to face greater challenges in finding employment. Moreover, OECD analysis suggests that the expanded use of private contractors to provide re-employment assistance under the FND is likely to increase cost-effectiveness.

The new Budget – released in June this year – encompasses a number of measures that should help improve the matching process between job seekers to job vacancies. Reforms to the benefit system will make employment more attractive for those workers with low earnings potential. At the same time, the cut in employer contributions at the bottom end of the wage ladder should enhance employment opportunities for this workforce group. This notwithstanding, the UK public employment service (Job Centre +) is under severe strain. While the number of job-seekers registered with the Job Centre + increased by more than 75% between 2007 and 2009, staff increased by less than 5% over the same period. While the large fiscal deficit makes it essential to focus on cost-effective programmes and target the most disadvantaged groups, labour market policies should remain adequately funded. In this context, it may also be of concern that the new Budget ends funding for two crisis measures, namely, the Future Jobs Fund and the Six Month Offer.”

The IMF:

The IMF has revised its 2010 projection for economic growth upwards, but left the 2011 forecast unchanged. In a key phrase, the IMF’s economists repeatedly refer to fiscal consolidation as a “medium term” priority. They argue that:

“most advanced economies do not need to tighten before 2011, because tightening sooner could undermine the fledgling recovery, but they should not add further stimulus.”

The countries that are in a position to start tightening policy now are the “fast-growing advanced and emerging economies” – which plainly does not include the Euro-zone (or, indeed, nearly any of the most developed countries, including the UK).

The IMF has revised its growth forecasts for the United Kingdom. It now predicts GDP growth of 1.2% in 2010 and 2.1% in 2011; compared with their earlier projections, these figures have been cut by 0.1 and 0.4 percentage points respectively.

This brings the 2010 figure in line with the Office for Budget Responsibility’s forecast, but is now 0.2 points below the OBR figure for 2011. This is significant, given the recent criticisms of the OBR for being over-optimistic about its growth predictions. The OBR’s claim that employment will grow by more than 2 million despite public sector cuts is heavily reliant on these figures.

The IMF predicts growth in the Euro area at 1.0% this year and 1.3% next year (down 0.2 points for 2011). It predicts growth in the USA at 3.3% this year and 2.9% next year (down 0.2 and 0.3 points respectively). These are the UK’s main export markets, and the OBR predicts growth in UK export markets of 4.1% this year and 4.7% next year.

The OBR

The OBR is relying significantly on what happens to trade for its predictions of GDP growth. Essentially, they expect that, from 2011, we will strong growth in exports, without an equivalent increase in imports:

Expenditure components of GDP: Forecasts (% change on a year earlier):
2009 2010 2011 2012 2013 2014 2015
Domestic demand
-5.3
1.6
1.4
1.9
2.2
2.2
2.3
Household consumption
-3.2
0.2
1.3
1.7
2.1
2.2
2.2
General government consumption
2.2
1.7
-1.1
-2.0
-2.3
-3.0
-2.1
Fixed investment
-14.9
-0.5
3.9
7.9
8.8
8.0
6.9
Business
-19.3
1.4
8.1
10.0
10.9
9.5
8.2
General government
15.7
-4.9
-19.0
-8.5
-6.6
0.6
2.0
Private dwellings
-19.7
-6.5
5.6
8.2
8.5
7.1
6.6
Change in inventories
-1.2
1.2
0.4
0.0
0.0
0.0
0.0
Exports of goods and services
-10.6
4.3
5.5
6.3
6.1
5.9
5.7
Imports of goods and services
-11.9
5.6
2.1
2.7
3.6
4.0
4.2

OBR’s figures mean that they expect exports and imports 2010 – 2015 to look like this:

graph

But this is not what has happened in previous recoveries. One aspect of the UK’s integration into the global economy is our propensity to consume imports, and in previous recoveries, we have increased imports at much the same rate as exports. In both the tables that follow I have started in the second quarter of growth following the downturn and finished at the point in the recovery at which employment levels increased by 2 million. Both are based on data from the Office for National Statistics.

graph

graph

In other words, the OBR’s forecast that employment will grow despite public sector cuts depends upon imports behaving in a way they have not before and on exports growing rapidly despite the weakening position of our main export markets. It is hard to be confident about this.

4 Responses to OECD and IMF start worrying about austerity

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