Britain’s economic vulnerability

Sometimes the most interesting publications have the most obscure titles. This is certainly the case with the recent paper on Cross-Cutting Themes in Major Article IV Consultations from the International Monetary Fund (IMF).


For those unfamiliar with IMF-speak Article IV consultations are the regular meetings the organisation’s staff have with economic policymakers in its member countries. They also result in detailed reports on a country’s economic health which virtually no one reads.


The new IMF paper compares the results of such consultations with five economic blocs: America, Britain, China, the eurozone and Japan. Together they account for two-thirds of global output and three-quarters of capital flows.


The aim of the study is to look at the similarities and differences in how the economic crisis has affected each of the economic blocs. Although the report says little that is new it confirms and pulls together useful information on the nature of the crisis.


For example, the report outlines how it was mainly financial links which transmitted the American shock to Britain and the eurozone. In contrast, trade links were more important to China and Japan.


Britain’s acute vulnerability is clear from the report. The banking sector accounted for 500% of GDP while financial flows fell by about half of GDP in the last quarter of 2008 alone.


Britain has also had the smallest fiscal stimulus of any of the main economic blocs relative to GDP. In terms of both the direct fiscal stimulus and “automatic stabilisers”—such as unemployment benefit—it lags behind the other blocs.


In contrast, the three large eurozone economies and America has a broadly comparable stimulus once automatic stabilisers are taken into account. This is despite Germany’s criticism of other countries for being too profligate in their fiscal measures.


In relation to tackling the crisis the report notes the “widespread agreement on the need for future financial adjustment” in Britain but says “additional concrete measures were needed”. Presumably this is a diplomatic way of calling for severe cuts in public spending.