The IMF's bi-annual Global Financial Stability Report released today named the UK as the country most at risk of slow economic recovery. The report outlined that the Bank of England could face a £180bn funding deficit in the coming year.
Such a deficit would lead to credit rationing and higher interest rates unless the Bank continues with its policy of quantitative easing, effectively printing more money to pump into the economy. The Bank of England increased quantitative easing by £50bn in August of this year but did not continue with an increase in September.
IMF report added: "As a proportion of GDP, the gap is largest in the United Kingdom, at about 15 per cent of GDP during 2009-10, relative to 2.4 per cent in the United States and 3 per cent in the euro area."
The funding gap is the result of Britain's over-reliance on a weakened financial sector. Speaking at the Labour Party Conference yesterday business secretary Lord Mandelson said "We relied too much on financial services. We should have been nurturing different bases in our economies."
The IMF also outlined that a funding gap of this kind presents a greater threat in Britain where consumers are relatively more reliant on credit debt. "UK households also traditionally rely more heavily on credit cards for borrowing than, say, German residents, and obtain mortgages more often", the report said.
On a more positive note, the report deemed the global economy to be on the 'road to recovery' with damage from the current crisis not as bad as had been initially feared, reducing the estimation of its losses from the financial crisis from $4 trillion ($4,000bn) to $3.4 trillion.
