You could forgive George Osborne for dreading this latest visit to the UK by Christine Lagarde. Less than three years ago the International Monetary Fund chief dealt what appeared to be a killer blow to the chancellor’s credibility when she told him to rethink his austerity drive. Her chief economist, Olivier Blanchard, went even further and warned Osborne he would be “playing with fire” if he didn’t let up on cuts.
Fast forward to now and, as Osborne said himself, Friday’s assessment from the IMF’s experts “could hardly be more positive”. The Fund flagged record high employment, a more resilient banking sector and a pace of economic growth that puts many of the UK’s peers in the shade.
More importantly, the IMF also gave a ringing endorsement of the government’s deficit-cutting plans. There was not even a hint of the caution shown back in 2013 when the IMF feared that cutting too far and too fast would derail the economy. Now, said Lagarde, the UK stood out as one of the countries that had shaken off the financial crisis. And all that, thanks to “considerable effort” on the government’s part.
So far so good. But of course the IMF’s job is not just to go round cheerleading governments and growth rates. In the post-crisis era, what matters more is anticipating the risks ahead. Even more important, is coming up with a plan to mitigate those risks.
For the UK, there were four key risks, Lagarde said. House prices were rising far faster than incomes and the UK’s trading position was precarious, with a “strikingly large” current account deficit. The other deficit, on the public finances, was coming down, but the gap between what the government spends and what it takes in was still too high. The fourth risk was whether the UK could really raise its productivity performance in line with other advanced economies. As Osborne noted when he spoke alongside Lagarde, French, German and American workers produce almost a third more per hour than their British counterparts.
The sun may be shining for Osborne right now, but none of those four challenges are easy fixes. In fact, all of them are longstanding problems for the UK. Housing supply is chronically low, and changing that will require a skills revolution in the embattled construction sector. Productivity problems are related to that skills shortage. The plans to cut the deficit could derail that punchy economic growth performance Osborne so proudly emphasises. As for the current account deficit, it repeatedly sets new records – and not in a good way.
Then, of course, there is a risk that Lagarde did not put on that list of four but it is clearly close to her heart: Brexit. She stopped short of saying what she or the IMF thought would happen to the economy in the event of the UK voting to leave the EU. She merely cited an apparent conversation between 18th-century philosophers Jean-Jacques Rousseau and Voltaire. When the former said to the latter “Life is tough”, Voltaire replied curtly: “Compared with what?”
But Lagarde is far too astute to miss an opportunity to say what she really thinks. Just as the IMF chief appeared to have answered the last question at her London press briefing and as reporters were closing their notepads, she leaned in closer and said: “But if I may say on a personal basis … I am very, very much hopeful that the UK stays within the EU.”
Lagarde was happy to back Osborne and the UK economy. But as recent history shows, what a difference a couple of years could make.
