Maybe this austerity stuff works after all

There is only so long you can avoid reality, although Keynesians can go on for a very very long time. This is about the latest observations on the UK economy by Christine Lagarde, the head of the IMF.

The head of the world’s economic watchdog delivered a stunning endorsement of the coalition’s record last night – saying Britain was setting an example to the rest of the world.

Christine Lagarde, director of the International Monetary Fund, said in much of the world growth was ‘too low, too fragile’.

But completing an extraordinary volte face on the Government’s austerity measures – which as recently as 2013 were being attacked by the IMP as ‘playing with fire’ – she called on other countries to look to the UK’s example.

Look all you like, but how would you explain it? Of course, with the modern textbook version of economic theory, this is all in the realm of impossible, just as they forecast in 2013. The story continues:

‘Certainly from a global perspective this is exactly the sort of result that we would like to see: more growth, less unemployment, a growth that is more inclusive, that is better shared, and a growth that is also sustainable and more balanced.’

Miss Lagarde’s endorsement will be greeted with delight by senior Conservatives and Liberal Democrats, who were angered by previous IMF criticism of their policies.

In 2013, the organisation warned that persevering with strict austerity policies risked denting Britain’s economic prospects.

Olivier Blanchard, chief economist at the IMF, said George Osborne was ‘playing with fire’ by pressing ahead with austerity, insisting: ‘In the face of weak demand it is really time to reconsider an adjustment to the fiscal consolidation plans.’

What would Blanchard know, anyway? Meanwhile, for the rest of the world’s economies, here is Ms Lagarde once again:

Strong headwinds from weak investment, substantial debt burdens and high unemployment are preventing a pickup in global economic growth despite a strengthening U.S. recovery and tumbling oil prices, International Monetary Fund Managing Director Christine Lagarde said.

A healthier U.S. and cheaper energy “won’t suffice to actually accelerate the growth or the potential for growth in the rest of the world,” the head of the emergency lender to nations said in a speech Thursday at the Council on Foreign Relations in Washington.

“If the global economy is weak, on its knees, it’s not going to help,” said Ms. Lagarde in remarks previewing the IMF’s latest forecasts for the global economy due out on Monday.

The eurozone, at risk of a third recession in six years, continues to struggle with the fallout from the 2008 financial crisis. Japan is also mired in low inflation, high debt and anemic growth. And output in many major emerging markets—economies that have provided most of the gas for global growth over the last decade—is slowing faster than expected.

However, there is the US, which has been suffering under sequestration and restrained public spending since 2013:

Nonetheless, the IMF is upgrading its forecast for economic output in the U.S., one of the few advanced economies bucking the weak global-growth trend. But the world’s biggest economy and a shot in the arm from cheaper gasoline aren’t cures for deep-seated weakness elsewhere, Ms. Lagarde said.

If you think in terms of aggregate demand, my only message to you is that you will never understand how an economy works. You certainly could not explain the relative success of the UK and US.

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