Prepare to bring back furlough, IMF tells Rishi Sunak

Rishi Sunak should bring back the furlough scheme if businesses are forced into another lockdown this winter, the International Monetary Fund (IMF) has warned.

The international watchdog said the Chancellor should be ready to reintroduce targeted measures to limit the economic damage from any new rules, as fears grow over the spread of the omicron variant.

In its latest review of the UK economy, the IMF predicted growth of 6.8pc this year and 5.5pc in 2022, with “a mild slowdown” in the early months of the new year.

Kristalina Georgieva, managing director of the IMF, said face-to-face industries would need particular support in a lockdown.

“Should there be the need for more restrictive measures, especially affecting contact-intensive sectors, then the policy support will have to be calibrated accordingly,” she said.

However, Ms Georgieva added that vaccines may be enough to keep the economy from such drastic action.

“It is highly unlikely that we would see a return of lockdowns the way they were last year. Why? Because we have introduced a multiplicity of measures to protect the economy while the pandemic is still with us, starting with the most important one: vaccination,” she said.

This depends on the path of the omicron variant.

In its review of the UK, the IMF said: “In the event of a virulent Covid-19 wave requiring widespread mandated closures, the authorities should be ready to redeploy a subset of the most successful previous exceptional programs (such as a furlough scheme and targeted support to the most vulnerable households and small businesses), but with due attention to lessons learned about their design (including tapering and timely sunset).”

Mark Flanagan, the IMF’s mission chief for the UK, said the Treasury must be “agile” in responding to the pandemic and its pressures on the economy.

“There are a number of tools the UK experimented with in the pandemic which were quite successful in many ways. They are the base on which one could build further responses, in the event of a very severe pandemic recurrence requiring lockdowns,” he said.

The IMF cautioned that despite the impact of the UK’s successful vaccine on the economy, the lasting effects of the pandemic “and the behavioural changes it has caused will not fade quickly”.

The shift to a more digital economy as well as pressures on supply chains and rising energy prices will all last well into 2022, it said.

Its economists expect inflation to peak at 5.5pc in the spring – almost treble the Bank of England’s 2pc target – before “gradually returning to target by early 2024 (helped by declining global energy prices, more robust supply chains, and tighter demand management policies)”.

Over the years to come, the IMF expects UK growth to slow to 1.5pc per year. It added that the pandemic will leave a permanent shortfall of between 2pc and 2.5pc in the economy, compared to growth that was expected before the pandemic struck.

That represents significant “scarring” to the economy, but is smaller than the permanent hit of up to 5pc the IMF had anticipated a year ago.

Mr Sunak said the vaccine booster programme will help the recovery, without commenting on the possibility of a new furlough scheme.

“The IMF have rightly reminded us of some of the dangers that lie ahead,” the Chancellor said.

“But people should be reassured that the IMF have also said we are entering this period of uncertainty with a resilient economic foundation, and that we have the right plans in place to help families and businesses with the cost of living; get the public finances back on track; and invest in the things that will grow our economy over the long term.”