IMF Reiterates Austerity Warning

The International Monetary Fund on Wednesday issued a warning against excessive austerity, singling out the United States and the United Kingdom as countries who can afford to slow the pace of what it described as “overly strong” belt tightening. According to the Fund, fiscal adjustment needs to proceed gradually, building on measures that limit damage to the economy in the short term.

The International Monetary Fund on Wednesday issued a warning against excessive austerity, singling out the United States and the United Kingdom as countries who can afford to slow the pace of what it described as “overly strong” belt tightening. According to the Fund, fiscal adjustment needs to proceed gradually, building on measures that limit damage to the economy in the short term.

In its latest report, the biannual World Economic Outlook, the Washington-based organisation said advanced economy policymakers have successfully defused two of the biggest short-term threats to the global recovery – the threat of a eurozone breakup and a sharp U.S. contraction because of the “fiscal cliff –, but warned that economic growth will be compromised because of excessive fiscal adjustments in the middle of an already sluggish global recovery.

While it said there was no “silver bullet” that could simultaneously solve problems of deficient demand and high public debt in any country, it singled out the United States and the United Kingdom as countries that need to ease off austerity.

On the U.S. economy, it said “there should be both less and better fiscal consolidation now and a commitment to more fiscal consolidation in the future.”

Related: Sequester Puts US Growth at Risk: IMF

On Europe, it called on countries with “sufficient fiscal space” – such as Germany – to ease further, while urging the United Kingdom to consider greater flexibility in its fiscal adjustment path in the light of lacklustre private sector demand.

It suggested the Chancellor, George Osborne, should consider reining back his austerity plan as the economy is dangerously close to a “triple-dip” recession.

The criticism is significant as the IMF had previously “stopped short of telling Osborne to change course”, said the Guardian. “The tougher line now being adopted presents a political headache for the chancellor, who until now has been able to rely on international support for his policies.”

Related: UK Economy to Face Decade of Austerity: CEBR Report

The IMF’s latest report shows how much its policy prescriptions have shifted in recent years. The organisation came under heavy criticism during financial crises in Asia and Latin America for insisting on painful fiscal adjustment programmes as the solution to debt problems, which critics said made sick economies even worse.

Now, IMF officials say they underestimated the effect that government spending has on growth, particularly during a crisis.

The shift in official stance is even more pronounced after Harvard professors Carmen Reinhard and Kenneth Rogoff were accused by fellow members of the intellectual fraternity of shoddy research and selective data reporting in their widely influential 2010 pro-austerity paper.

Related: IMF Chief Economist Admits To Austerity Mistake

Related: Influential Harvard Paper on Debt and Growth Riddled With Critical Flaws

Underlining the growth worries, the IMF cut its economic forecasts for virtually every major region in 2013. It sees the eurozone economy contracting by 0.3 percent in 2013, slightly more than it did in January.

Japan was the only developed economy to come out with a good prognosis from the IMF.

The IMF said that the country, which has been mired in recession for much of the last 20 years, would see growth both this year and next, of 1.4 percent and 1.6 percent respectively.

It also said consumer prices would notch up 0.1 percent this year and hit a rare high of 3 percent in 2014, thanks to the Bank of Japan’s new bout of monetary easing announced earlier this month.

Related: IMF Backs Japan’s $1.4tn Monetary Policy Boost