Royal Mail IPO: ministers to increase amount of public shares

Government is making plans to ensure 'smaller investors get their share', and do not lose out to banks and hedge funds

The government will bow to a mounting outcry and ensure the public do not lose out to banks, hedge funds and other financial speculators in the £3bn selloff of Royal Mail shares.

The Guardian understands that ministers are making plans to increase amount of Royal Mail shares available to the public at the expense of those set aside for banks, following overwhelming demand in the biggest privatisation since the sale of the railways in the 1990s.

Michael Fallon, the business minister in charge of the flotation, said he would do all he could to ensure "smaller investors get their fair share", ahead of Tuesday's midnight deadline to buy stock.

Fallon had promised that about 30% of the shares on offer would be reserved for the public but is now understood to be planning to increase this proportion available for small investors and cut back on the amount going to banks if public demand massively exceeds supply.

He said: "No decisions have been taken on allocation but I'm committed to making sure smaller investors get their fair share."

The government has been under pressure to ensure the public do not lose out to banks and hedge funds, which are hoping to make instant profits from the sale of the 500-year-old postal service.

Chuka Umunna, the shadow business secretary, said: "This is turning into a dream and a bonanza for City speculators and hedge funds, meanwhile the taxpayer … is getting massively shortchanged."

Financial institutions have ordered several times the number of shares available to them, amid reports that the government hugely undervalued the company, and the shares could soar by more than 30% on their first day's trading on Friday.

Stockbrokers have also reported unprecedented public demand for the shares, to be priced at between £3-3.30 each, with some staying open all weekend and until midnight Tuesday when applications close.

Alastair McCaig, market strategist at IG Index, said public demand for Royal Mail's shares has been "even stronger than we saw in Facebook".

IG said excitement over the flotation had sparked a frenzy in the pre-trading "grey market", with investors betting the shares will rise to £4 on Friday – 70p more than the maximum the government has allowed itself to sell them for.

If they do reach £4, the government will have lost out on an extra £400m it could have made if it priced the shares at £4, rather than £3.30.

Panmure Gordon analyst Gert Zonneveld – the only analyst to have published research on the shares – has said he is convinced the government undervalued Royal Mail by more than £1bn. Zonneveld said the shares should have been sold between £3.70 and £4.50, considerably higher than the government's initial range.

Vince Cable, the business secretary, on Monday hit back at Umunna for accusing the government of undervaluing the company and selling it on the cheap.

"It is irresponsible to imply that a share offering looks significantly undervalued," he wrote in a letter.. "I think you should consider the risk that you may be influencing the decisions of retail investors. Equity investment always involves risk, particularly when the company in question is new to the market. In the light of this it is dangerous to imply that there is an easy bargain to be made.

"Panmure Gordon is only one voice and their report notes both near term risks and opportunities. We are alert to value for money criticism and have learnt from the mistakes of previous governments' asset sales. QinetiQ is one key example under the last government."

In 2007, the National Audit Office criticised the float of defence company QinetiQ saying taxpayers lost out to the tune of tens of millions of pounds.

The government's valuation of Royal Mail is based on advice from investment banks Goldman Sachs and UBS after £21.7m in fees was paid to advisers. Applications for shares close at 11.59pm on Tuesday. The minimum public application is £750. If the public apply for more shares than those available they will "scaled back", meaning applicants will not be able to buy all the shares they have applied for. Big applications will be scaled back at a greater rate than small applications.

Up to 62% of the company will be listed on the stock market on Friday. A further 10% will be given to Royal Mail's 150,000 employees.

The final price the shares sell at will not be decided until the company floats on the stock market on Friday.

Trading places

One of the accusations levelled at the Thatcher and Major governments was that they sold off Britain's nationalised industries too cheaply. A look at how the shares fared on their first day of trading lends weight to this argument, although long-term returns give a clearer picture of a company's value.

British Telecom was the Thatcher government's first big privatisation. Its shares jumped 35% on the first day of trading in 1984, but when two later tranches were offered the price rose only 5% each time. British Gas followed in 1986, helped by its "Tell Sid" campaign. Its shares rose 10% on the first day. Powergen and National Power both soared by about 22% on their first trading days but when further batches of shares were sold later the price rose less than 5% in both cases.

In 1987, British Airways' shares leapt by two thirds on their first day of trading. But later that year BP's privatisation was launched at the time of Black Monday when shares plunged in New York and London on 19 October. Underwriters were left holding shares priced at 330p that were trading at 262p.

Article Source : http://www.guardian.co.uk

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New car sales hit five-year high

SMMT figures show rise for 19th consecutive month as car market 'reflects growing economic confidence'

Car sales jumped in September to record the strongest monthly figures in more than five years as the automotive industry underlined its importance to the UK's economic recovery.

According to the Society of Motor Manufacturers and Traders (SMMT) sales rose 12.1% last month to 403,136 vehicles, following 10.9% annual growth in August and 12.7% growth in July.

The car industry has now registered 19 months of improving sales and become widely regarded as one of the main reasons why the UK avoided a triple dip recession this year. The numbers for September – a key sales month when new registration plates are issued – represent the highest monthly total since March 2008.

Along with mobile phone contract sales and a surge in demand for hotels and restaurants, cars have proved to be the main big-ticket item favoured by consumers, who until recently have shunned new furniture and clothes in favour of new vehicles.

Private new car sales were particularly healthy, which Howard Archer, UK economist at IHS Global Insight, said was "fuelled by sharply improved consumer confidence and record high employment".

He said consumers were also taking up special offers and packages, and shifting to more fuel-efficient cars at a time of high petrol prices.

"The rise in consumer confidence to a 70-month high in September and ongoing improvement in business confidence came at a particularly good time for the car industry given that September is a key month for sales," he said.

UK car sales. Source: SMMT

"Furthermore, there are likely to be a significant number of people who have held off for an extended period from replacing their car, due to difficult times, who have now reached the stage where they really need to act and are more prepared to do so due to the brighter outlook."

The mis-selling of payment protection insurance has also been singled out as a boon for car sales, with some of the £11.5bn in compensation paid out to consumers being spent on new vehicles.

Private car sales climbed 17.9% year-on-year to reach 208,844 in September. Overall, private car sales were up 16.7% year-on-year in the first nine months of 2013.

However, several economists have issued warnings that sales may plateau as the capacity of consumers to borrow to buy new cars begins to wane.

The latest figures show that annual earnings growth was limited to 1% in the three months to July while consumer price inflation stood at 2.7% in August.

On the plus side, real household disposable income rose by 1.5% quarter-on-quarter in the second quarter, mainly as a result of the coalition government's hike in the personal tax threshold, but this followed a dip of 1.7% in the first quarter and disposable incomes were down by 0.7% year-on-year.

Most of Britain's car manufacturing is exported and the Nissan Note, which recently began production at the company's UK base in Sunderland is no exception. Honda, Toyota and BMW's Oxford plant making Mini Coopers are all working at capacity and exporting around eight out of 10 cars they produce.German carmaker Daimler said on Friday that it sold a record number of Mercedes-Benz cars in September. The Stuttgart-based firm said it sold 142,994 vehicles in September, up 15.9% on the same month a year before.

It credited new versions of its E-Class and S-Class sedans, as well as increased sales of its smaller models such as the A, B and CLA classes. Compacts increased sales as a group by 68.3% in the first nine months of the year.

September sales rose 6.7% in the US, the brand's biggest single market, and 21.2% in China. Sales at home in Germany rose only 1.5%, however.

Mercedes-Benz also increased sales 14.2% in Europe, much of it in Britain and areas such as Sweden that have recovered more strongly.

Archer said: "The motor industry will be hoping that the recent improvement in UK economic activity is sustained and extended, and that this leads to further strengthening in consumer and business confidence, and their willingness to splash out on new cars."

Article Source : http://www.guardian.co.uk

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Royal Mail's first-class returns fail to silence critics

On Friday many people could see the value of their stake instantly rocket. While 96% of postal workers are against it, for the government – and City investors – it offers a huge windfall

A half millennium of history will end on Friday when the government goes where even Margaret Thatcher dared not tread and privatises Royal Mail.

In between divorcing and beheading wives, Henry VIII appointed Brian Tuke to the newly created role of "Master of the Posts" in 1516. The job was a forerunner to Postmaster General and the service – which for its first 119 years was reserved for royals to send letters between palaces – became Royal Mail.

The postal service, the world's oldest, has remained in public ownership ever since, despite attempts by both the Tories' Lord Heseltine and Labour's Lord Mandelson to flog it and swell the nation's coffers.

Thatcher, who sold off British Gas, British Airways, British Telecom and dozens of other state-owned institutions in the 1980s, drew the line at Royal Mail, saying famously that she was "not prepared to have the Queen's head privatised".

But on 7am on Friday up to 70% of Royal Mail will be sold to investors and listed on the London Stock Exchange – swelling Treasury coffers by about £2bn, though that will no more than dent the £115.7bn deficit the government ran up on the public finances last year.

The government is pressing ahead with the sale despite fierce opposition from the public, politicians of all hues and Royal Mail's 150,000 postmen and women, who are planning days of debilitating strike action in protest.

Vince Cable and Michael Fallon, the business secretary and business minister in charge of the sale, say that in these straitened economic times Royal Mail can no longer be owned by the state as it has to compete with schools and hospitals for much-need investment. Royal Mail needs to borrow hundreds of millions of pounds to prepare for a future delivering parcels ordered online from the likes of Amazon and Asos, rather than cards and letters that are dying out in favour of emails and messages on Facebook or Twitter. Letter traffic has dropped by a quarter over the past five years to just 58m items a day.

"It cannot be right for Royal Mail to come cap-in-hand to ministers each time it wants to invest and innovate," Cable said. "The public will always want government to invest in schools and hospitals ahead of Royal Mail."

Fallon has said that if Royal Mail were to remain in state hands "every £1 it borrows is another £1 on the national debt. That means growing the national debt. No responsible party could propose that in the current environment, or for that matter in any environment, when Royal Mail – run on a fully commercial basis – has the capacity to be cash-generative, profitable and perfectly able to raise the capital it needs from the private sector."

After years of heavy losses – £320m in 2010 and £258m in 2011 – Royal Mail is now steadily increasing its profits. In the latest accounts available, for the six months to September 2012, it made operating profits of £144m compared with £12m a year earlier, while sales remained roughly flat at £4.4bn.

Royal Mail has also been given greater freedom to increase the price of stamps – over the past five years the price of a first-class stamp has risen from 41p to 60p – and is allowed to make a "reasonable commercial return" (a margin of 5-10%) on its universal service obligation to deliver to every address in the country six days a week, which the government promises will be maintained for the foreseeable future, no matter who owns the company.

Royal Mail has also been freed of its £12bn pension fund deficit by transferring the scheme from the company to the state, at a cost of £1.3bn in the first year alone.

City experts reckon these changes outweigh the threat of strike action and any political and public backlash and will make Royal Mail very attractive both to big banks and investment firms as well as the public, who are able to buy its shares as long as they can stump up a minimum of £750.

Gert Zonneveld, managing director of stockbroker Panmure Gordon, said he expects the flotation to be a "raging success", with investors trying to buy up to 10 times as many shares as are available, But most of the demand, he said, is down to the "exceptionally attractive" value the government has placed on the shares. It has said they will be priced between 260p and 330p, giving the company a maximum market value of £3.3bn.

Zonneveld reckons the government's range represents an "exceptionally good entry level for investors", and said the shares should have been priced at up to 450p.

"I'm so convinced they [the government] got it wrong," Zonneveld said. "I think they're more than £1bn too low [in their valuation of the company]."

By comparing Royal Mail's profits and revenues to that of other listed postal services in other countries, Zonneveld thinks the company should be valued between £3.7bn and £4.5bn.

Under his valuation, Royal Mail would join the FTSE 100 list of Britain's biggest companies, which means tracker funds would be forced to buy the stock, sending demand – and the price – even higher. "I think this is going to be massively oversubscribed," he said. "Institutional investors who want £10m will increase their order to £50m because they know their orders will be scaled back."

He predicts that the share price could rise by 30% on the first day of trading on Friday. It means the government could lose out on about an extra £500m if it had priced the shares at 450p. The government has said it will not increase the price range above 330p no matter how high the demand for the shares.

The expected jump in the share price could go some way to placating Royal Mail's 150,000 employees, who are in the midst of voting for nationwide strike action, the first since 2009, which cannot take place until 23 October.

The government is giving employees 10% of the shares for free. If the shares at the top end of the government's 330p estimate,each employee will own shares worth £2,200 on Friday morning. If they perform as Zonneveld predicts they could be worth £2,860 by Friday afternoon.

But even the prospect of nearly £3,000 is not enough to win over most postmen and women. The Communication Workers Union, which represents 115,000 Royal Mail staff, says that 96% of employees are adamant in their opposition to the sell-off.

"I don't want the money," Theodore Mbungu, 56, said as he trudged about his north London round last week. "I want my job to stay the same. When it's private we will be paid less and have to work harder. What other job is there where you talk to people every day and they are happy and smiling and excited to see you?

"In what other job can you do your work and then go straight home, even though you're still being paid? I love being a postman. It's the best job in this country, but I know once the men in the City get their hands on it, it will never be the same again."

Article Source : http://www.guardian.co.uk
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Energy lobby insiders will lead cold war against Labour

Ed Miliband's threatened price freeze will be resisted by people representing the big six power companies who have been put in key places in government

ScottishPower, one of the UK's big six energy companies, turned up the public heat on Labour leader Ed Miliband last week by warning that investment in new power stations will be endangered by his plans for a price freeze.

But it was not just Labour that was coming under pressure. The industry's considerable lobbying powers were acknowledged at the Conservative party conference when the energy minister, Michael Fallon, referred to the sector's trade body, Energy UK, as "one of the strongest and most well-argued lobbies there is".

But the real lobbying is going on behind the scenes, where the major players have a large network of individuals defending the sector's interests.

Keith Anderson, chief corporate officer at ScottishPower, told Miliband ina letter released to the media that a freeze would foment doubts and create an atmosphere that would affect "the appetite to invest".

But Angela Knight, chief executive of Energy UK, was later peddling a more low-key line: "We need a calm, considered debate and want to engage all parties and consumers in the discussion."

The Labour party is wary of Knight, a former Conservative MP and until little more than a year ago chief executive of the British Bankers' Association. Bilateral talks are expected to take place between Miliband and each of the big six companies, with Knight kept at a distance.

And one public relations adviser to the power companies said privately that the big six would now begin a behind-the-scenes cold war, rather than continue the open hostility: "It would be a big mistake to wage a big campaign against this. It would make them look even more like pantomime villains than they already do. Instead, they will work quietly to do their very best, aided by the Murdoch press and others, to make sure Labour does not get in."

The firms would also use the employees they have already placed on secondments in the heart of government, and their scores of public affairs experts, to reinforce the carefully cultivated impression that they were indispensable to the government's plans to create a low-carbon energy system, sources said.

"The Department of Energy and Climate Change [Decc] is under the strong impression that it cannot do the things it wants to do without the big six – it just simply doesn't believe it is possible," another lobbyist said.

Current government policy, developed by the Conservatives while in opposition, was heavily influenced by two of the big six – EDF and British Gas-owner Centrica – according to industry sources: "EDF and Centrica are now just an offshoot of Decc – they are all so in bed with each other they are indistinguishable."

It was Centrica's chairman, Sir Roger Carr, who was most aggressive in his comments following the Miliband speech, arguing that a price freeze would lead to "economic ruin". Equally, Centrica is one of only three big six firms that has yet to respond formally to a Labour letter setting out its policy of a 20-month price freeze if Miliband were to win the 2015 general election.

After the 2010 election, Centrica's chief executive, Sam Laidlaw, was appointed to David Cameron's business advisory council, while the prime minister's current energy adviser in Downing Street, Tara Singh, is a former Centrica employee. The source suggested that the same help in writing policy would be offered to Labour.

Energy companies, including Centrica, EDF and RWE npower, have placed dozens of staff in government departments on secondments since 2008, either funded by the taxpayer or provided for nothing. (Civil servants also travel in the opposite direction and spend time in energy companies.) By the end of 2012 almost two dozen were in place in the energy department.

Tom Burke, a former head of Friends of the Earth who worked as special adviser to several Conservative ministers, said: "The secondments are pernicious, but the real power is how [the energy companies] shape the discourse through the media – that is where their many lobbyists do their real work. They constantly feed hard-pressed journalists lines their editors will like."

The energy industry's access to ministers is shown by 195 declared meetings between Decc ministers and energy companies and their lobby groups in the 10 months after the 2010 general election alone. There were 17 meetings with green campaign groups in the same period.

The heat on Miliband, Fallon and their parliamentary colleagues is clearly going to remain turned up.

WILL IT GO DARK?

Ed Miliband has been warned about potential power blackouts if he introduces a price freeze, but this did not happen in the past when energy bills were controlled by the state.

In fact, 15 of the European Union's 28 member governments already protect customers from steep power rises, without major problems.

ScottishPower warned last week that investment might be cut in Britain should there be a price cap, but tariff rises are strictly controlled in Spain, the home of its parent group, Iberdrola. It was only last month that Iberdrola received permission for a 3% rise this year. Scottish has yet to announce increases for 2013, but last December alone it raised gas and electricity prices by 7%.

French state-controlled EDF, another of the big six firms operating in Britain, is also restricted from raising its prices above an officially imposed index-linked formula in its domestic market.

This summer EDF was allowed to raise electricity prices by just 5% for the next 12 months, with the same agreed for the following August. But the rise in France has tended to be around 2% per annum in recent years.

Last year the Belgian government introduced its own freeze on the tariffs of variable energy contracts for residential consumers and small businesses from 1 April to the end of December 2012.

Portugal, Denmark and Greece also have controlled prices, while British customers pay the fourth-highest bills for electricity in Europe and the seventh-highest for gas. 

Article Source : http://www.guardian.co.uk

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George Osborne's credibility gap

The chancellor claims he'll balance the books and avoid tax rises. But his record so far is of failure

The party conference season doesn't always change the political weather. This year it has. Ed Miliband's decision to stand up to the power companies in the face of market failure struck a loud chord with the public. And no, it's not anti-business to challenge such failures.

His jibe that the rising economic tide would lift only yachts, struck a raw nerve with the Tories. So they rushed out measures to help home buyers, despite real fears of a housing bubble. They announced a married couples' allowance worth less than £4 a week. They promised to freeze fuel duty. The funding of these promises, costing more than £2bn, is to be met from some unidentified source. Strange that when Labour makes promises, the Tories claim it will mean more borrowing, yet it's fine for them to make unfunded promises.

The Tories have also changed their tune on the economy. In September George Osborne claimed to have slain the dragon of downturn. Many economists have their doubts. It was also bad politics. A dead dragon poses no political threat. So this week the beast has been resurrected: it's not over, after all.

The chancellor promises another six or seven years of austerity. After that, he claims he will balance the books. This raises questions about both the credibility and the desirability of his promise. On credibility, consider the facts: in 2010 the economy was growing and we still had ourtriple-A rating – yet at the time Osborne claimed we were like Greece. More than that, he said he would balance the books by 2015.

Today, having moved considerably from his original plans, he is borrowing 68% more than he promised. He will borrow £96bn in election year alone. The deficit, far from being eradicated, is still at £120bn. Osborne's debt reduction target has been kicked into the far distance, and the effect of many of the cuts pencilled in for the next few years has yet to be felt.

So the chancellor's record is not good.

Is it really credible to deliver the scale of the cuts needed to balance the books and avoid tax rises, as Osborne now says it is? Not without economic growth it isn't – something that the prime minister seemed to concede in his speech yesterday. Is it credible to deliver a 20% real cut in the police budget, both in this parliament and the next?

There are two issues here. First, what sort of services will the public get if they are hacked back on this scale? The Tories need to tell us. Second, the Conservatives' rhetoric often implies that the public sector is bad and the private sector the only good. Yet, for example, this country's future depends on the quality of our education, not just for the few but for the many. And what price do we put on good quality health care, let alone the increasing costs of caring for a growing elderly population?

This is a debate we must have. It is essential to bring down our borrowing and debt. It's worth remembering that in 1997 Britain's debt was the second highest in the G7. A decade on, it was the second lowest. But these reductions must be delivered both credibly and in a way that does not damage the UK's economic and social fabric. The best way of doing that is to get sustainable growth. To promise a balanced budget, come what may, carries the risk of damaging cuts and unacceptable tax rises.

Although economic growth seems to be returning, it is still lagging way below what was expected by now. What we produce as a country, our GDP, is not likely to return to its pre-crisis levels until 2018. This government is not on strong ground, either in blaming the crisis on the spending it supported in opposition, or on the credibility of its performance since the election.

The Labour party will stay in the middle ground, promoting enterprise and growth and never afraid to challenge market failures. Nor should we be scared to make the case that the public and a thriving private sector need each other. We need them both.

Article Source : http://www.guardian.co.uk

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Strong UK services data 'points to fastest economic growth in 15 years'

PMI score suggests economy grew by 1.2% in the three months to September, analyst says

Britain's economy may have expanded at its fastest pace in 15 years over the past three months, analysts suggested on Thursday, after an upbeat survey of the key services sector suggested it is growing at a healthy clip.

The monthly Purchasing Managers' Index for services declined slightly, to 60.3 in September, from 60.5 in August, but the average score over the quarter suggested the fastest growth in services output since mid-1997.

Chris Williamson, chief economist of data provider Markit, which compiles the survey, said taken together with similarly strong readings for activity in the much smaller construction and manufacturing sectors, this latest survey signals even stronger growth in GDP than the 0.7% recorded between April and June.

"Historical comparisons of the PMI with official GDP data suggest that the economy grew by 1.2% in the three months to September. This was a marked gathering in the rate of expansion compared with the 0.7% increase seen in the second quarter."

GDP growth Photograph: Graphic

Michael Tinsley, of BNP Paribas, added that in the second quarter of 1997, the last time the combined PMI surveys were this strong, GDP growth was 1.2% – well above Britain's long-term average – and averaged 1% every quarter over the following year.

"It remains to be seen whether the UK can repeat anything like that feat, and we would prudently expect some cooling in the data in coming quarters. But for now there is no mistake the economy is growing jolly fast," he said.

Firms reported that incoming new business had continued to be strong, they were hiring new staff, and expectations of future activity were also positive – a marked turnaround from the start of 2013, when many economists feared that the UK may have dipped into a renewed recession.

Howard Archer, of consultancy IHS Global Insight, described the latest survey as "very good news" – though he warned that it could force the Bank of England to take earlier action on interest rates than it currently expects. Under new governor Mark Carney's policy of "forward guidance", the Bank's monetary policy committee has pledged not to raise interest rates until the unemployment rate falls at least to 7%, provided inflation does not get out of control. The committee expects that not to happen for up to three years.

But many City analysts are betting that borrowing costs will have to rise sooner, as the economic recovery gathers pace. The first estimate of GDP growth for the third quarter of 2013 will be published later this month.

Earlier on Thursday, PMI surveys for the euro area suggested that the 17-member zone continued to clamber out of recession in the third quarter.

The services index jumped to a 27-month high of 52.2 – above the 50 mark that divides expansion from contraction. German activity expanded for the fourth successive month; while the French survey suggested the country's services sector scored its first expansion in more than a year.

The eurozone economy expanded by 0.3% in the second quarter of the year, marking the end of a gruelling 18-month downturn; but several member-countries, including Spain and Italy, and bailed-out Greece and Cyprus, remain in recession.

Article Source : http://www.guardian.co.uk

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Christine Lagarde tells US that debt crisis threatens world economy

IMF chief says US politicians must overcome shutdown and raise US debt ceiling before 17 October deadline

Shares in New York fell sharply on Thursday after the US Treasury warned that the budget fight between Republicans and Democrats in Washington risked plunging the world's biggest economy into its worst slump since the Great Depression.

President Barack Obama turned up the pressure on Republicans on Capitol Hill after the Treasury and the International Monetary Fund joined senior Wall Street figures in urging a deal well ahead of the deadline for raising America's debt ceiling on 17 October.

"A default would be unprecedented and has the potential to be catastrophic," the Treasury reported.

"Credit markets could freeze, the value of the dollar could plummet, US interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse."

The recession of five years ago was the most severe the US has suffered and the economy has recovered only slowly from the damage caused by the financial crash. A health check of the service sector showed a marked slowdown in activity even before large parts of the federal government were shut down as a result of the failure to agree a budget deal.

Obama accused the Tea Party wing of the Republicans of being "extremists" who were "demanding a ransom for doing their jobs". The president added: "Congress has to pass a budget that funds our government with no partisan strings attached."

Heightened anxiety in the financial markets was reflected in an early 170 point fall in the Dow Jones industrial average and a rise in interest rates for one-month US Treasury bonds.

Christine Lagarde, the IMF's managing director, urged America's politicians to settle their differences before the dispute harmed the entire global economy.

Speaking ahead of the fund's annual meeting in Washington next week, Lagarde said it was "mission critical" that Democrats and Republicans raise the US debt ceiling before the 17 October deadline. Lagarde said the dispute was a fresh setback for a global economy that would take at least a decade to recover from the slump of 2008-09.

"I have said many times before that the US needs to "slow down and hurry up" – by that I mean less fiscal adjustment today and more tomorrow," Lagarde said. She added that the world's biggest economy needed to put its finances in order, but favoured back-loaded measures to raise revenues and limit entitlement spending such as medicare that did not jeopardise short-term growth.

"In the midst of this fiscal challenge, the ongoing political uncertainty over the budget and the debt ceiling does not help. The government shutdown is bad enough, but failure to raise the debt ceiling would be far worse, and could very seriously damage not only the US economy, but the entire global economy.

"So it is 'mission-critical' that this be resolved as soon as possible."

Mario Draghi, the president of the European Central Bank, has also warned of the risks from a protracted federal shutdown.

Lagarde's speech followed an appeal by senior figures on Wall Street for a budget to be passed in Washington. The IMF managing director said America's recovery was being held back by over-hasty budget cuts. "Households are in better shape, the housing sector is looking brighter, and the private sector engine is humming again. And yet, growth this year will still be too low – below 2% – due to too much fiscal adjustment. This should ease up next year, with growth about a percentage point higher."

Lagarde said: "We at the IMF are very familiar with the ebb and flow of economic cycles, with the shift from recession to recovery. Experience tells us that this process usually takes a year or two, or a bit longer if the situation is especially severe. The transitions I am talking about today are different. They will likely play out over the rest of the decade, if not longer."

Article Source : http://www.guardian.co.uk

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