MercoPress. South Atlantic News Agency

UK deeper in recession; IMF recommends more stimuli measures

Minister Osborne has vowed to press ahead with harsh austerity measures but IMF suggests loosening the purse-strings

Britain fell deeper into recession than initially thought in the first quarter of 2012 due to a slump in construction output, raising the likelihood that the Bank will opt to inject more stimuli to protect the economy from the Euro zone debt crisis.

IMF Managing Director Christine Lagarde said the UK should be ready to consider more quantitative easing (QE) and even cutting interest rates.

Britain is in its second recession since the 2007-2008 financial crisis, and the prospects for a recovery are cloudy as leaders in the Euro zone, Britain's biggest trading partner, are still far from resolving their debt woes.

The Bank of England’s Monetary Policy Committee (MPC) has indicated it is ready to pump more money into the economy having paused its quantitative easing program at 325 billion pounds this month, amid growing worries about a break-up of the currency union.

The UK Office for National Statistics said the economy shrank by 0.3% in the first quarter of this year, more than an initial estimate of a 0.2% decline, and confounding analysts' forecasts for an unchanged reading.

Year-on-year, the economy contracted by 0.1%, the first annual decline since Q4 2009.

The figures will make uncomfortable reading for British finance Minister George Osborne, who has vowed to press ahead with harsh austerity measures to curb Britain's debts and has argued that the private sector can fill the gap in public spending.

Britain's economy has expanded by just 0.3% since the Conservative/Liberal Democrat government came to power in 2010, and Thursday's figures showed government spending made the biggest contribution to the economy.

In its annual report on the UK economy the IMF endorsed the government's deficit cutting plan, saying it was essential, but it said if growth failed to pick up, the government would have to consider delaying cuts.

“Unfortunately the economic recovery in the UK has not yet taken hold and uncertainties abound,” said IMF managing director Christine Lagarde.

“The stresses in the Euro area affect the UK through many channels. Growth is too slow and unemployment - including youth unemployment - is too high. Policies to bolster demand before low growth becomes entrenched are needed.”

It said the Bank of England's Monetary Policy Committee (MPC), which sets interest rates and authorises other monetary boosts, such as QE, (pumping money into the economy to boost growth), should look at loosening the purse-strings.

These stimulus measures can lead to higher inflation, but the IMF report comes when the latest UK inflation figures show a sharp drop in the annual rate to 3% last month, the lowest rate since February 2010.

In its official statement on the UK economy, the IMF mission states: “Fiscal easing measures...should focus on temporary tax cuts and greater infrastructure spending, as these may be more credibly temporary than increases in current spending.”