The UK should be ready to bring back targeted furlough support if the rapid spread of the Omicron variant forces the Government to lock down parts of the economy, the International Monetary Fund (IMF) has said.
The IMF cautioned over the “major risk” facing the UK economy from new waves of the pandemic, with Omicron posing a further threat to crisis-hit supply chains, already soaring inflation and consumer spending.
It said Britain should be “ready to deploy” a revamped, mini form of furlough in the event of widespread closures to help sectors suffering the most, such as hospitality.
While the Washington-based group said the UK economy had proved resilient, it cautioned Britain was heading for a “mild slowdown” due to new restrictions to control the spread of coronavirus and supply chain disruption.
In its end of year review of the UK economy, 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 programme, such as a furlough scheme and targeted support to the most vulnerable households and small businesses.”
“Omicron could extend global demand-supply imbalances and inflationary pressures beyond projections, but if it or a future outbreak is more virulent this could weigh on confidence and demand, with disinflationary impact,” it cautioned.
The IMF joined Chancellor Rishi Sunak in stressing the importance of vaccinations and booster jabs to help shield the economy and the need for more damaging lockdowns.
The IMF also cautioned the Bank of England against “inaction bias” and waiting too long to raise interest rates from their historic low of 0.1% as it forecast inflation soaring to 5.5% next spring.
The alert comes just two days ahead of the Bank’s latest interest rate decision, with experts expecting policymakers to hold off once more from a hike until Omicron uncertainty has passed.
But the IMF admitted the Bank will have to strike a difficult balance between reining in inflation and supporting growth.
It forecasts a permanent scarring to the UK economy of between 2% to 2.5% caused by the pandemic.
This is down from its 4% to 5% previous estimation, but sees the UK suffering the worst, long-term impact from Covid-19 of all the G7 group of advanced economies.
Mr Sunak said the path to economic recovery was “never going to be smooth”, as the IMF flagged uncertainty and challenges ahead.
He said: “The most important thing we can do to safeguard the economic recovery and protect the British people’s lives and livelihoods is for everyone to get boosted now.
“Doing so will save lives and help avoid more stringent restrictions later on.”
The IMF calculates that successful vaccination programmes worldwide could boost global economic output by 5.3 trillion US dollars (£4 trillion) between now and 2025.
At a news conference after the report was published, IMF managing director, Kristalina Georgieva, said: “We do see that the impact of vaccinations on the economy is very significant.”
She added: “We do not expect the need to return either to the full lockdowns we have seen or the policy support of the kind that this type of lockdown requires.
“Should there be a need of more restrictive measures especially affecting contact-intensive services, then the policy support will have to be calibrated accordingly.”