IMF Mission Completes the 2014 Article IV Consultation Discussions with the United Kingdom

Press Release No. 14/263
June 6, 2014

A mission from the International Monetary Fund (IMF), led by Mr. Krishna Srinivasan, Assistant Director of the Europe Department, visited London from May 22 to June 6 to conduct discussions on the annual Article IV review of the British economy. The mission held highly constructive discussions with senior officials from the government, the Bank of England, the Financial Conduct Authority, private sector representatives, and academics to exchange views on prospects for the economy, reforms and challenges ahead. The IMF's Managing Director, Mrs. Christine Lagarde, joined the final policy discussions and met with the Chancellor of the Exchequer Mr. George Osborne. The discussions analyzed the strengths of the UK economy and its macroeconomic performance in the context of the world economic recovery, but also pointed to the risks it was still facing: productivity growth remaining well below historic norms, housing market imbalances, and risks from the external environment. The discussions analyzed the strengths of the UK economy and its macroeconomic performance in the context of the global economic recovery, the risks it was still facing, and the policy challenges.

At the end of her visit, Mrs. Lagarde made the following remarks:

“Fund staff has been here for the past two weeks, and has had a very constructive dialogue with the various stakeholders.

“The UK has not been immune to the global financial crisis. While there is still much to be done around the world to deal with the impact of the crisis, in many countries affected by the crisis we are beginning to see some good news. And the news coming out of the UK recently is almost all good.

“Growth in 2014 is projected to be 2.9 percent, the fastest among the major advanced economies. At the same time, inflation has come down sharply. And so has unemployment, although it still remains high, at 6.8 percent. And while the recovery was at first highly dependent on consumption, there are now signs that the economy is rebalancing toward an investment-led recovery. This bodes well for the recovery.

“But, as usual, there is no room for complacency, as significant risks are appearing on the horizon. On the domestic front, productivity remains weak and house price inflation is broadening.

“Externally, the relative calm in global financial markets could be disrupted by an untoward response to the unwinding of unconventional monetary policies in the United States, a reemergence of stress in the euro area, or a sharp slowdown in emerging economies.

“These challenges require an appropriate policy mix. With inflation below target and sizeable slack in the economy, we believe that monetary policy should remain accommodative, for now. But we also recognize that keeping interest rates low could further fuel house prices and increase risks to financial stability.

“This is why we are calling upon the Financial Policy Committee of the Bank of England to pursue macroprudential measures early and in a gradual fashion, as the first line of defense against risks to financial stability arising from the housing market.

“But rising house prices fundamentally reflect demand that greatly exceeds supply. Addressing imbalances in the housing market by alleviating supply-side constraints will require further measures to increase the availability of land for development and to remove unnecessary constraints on land use.

“Fiscal consolidation has been a key policy anchor for the UK economy. The deficit has been halved to 5¾ percent of GDP over the last four years. While adhering to the medium-term framework, the government has shown welcome flexibility in implementation, allowing the automatic stabilizers to operate while continuing with the underlying adjustment effort.

“Deficit reduction will continue in 2014, at a pace that is appropriate given the stage of economic recovery. Going forward, fiscal consolidation should continue to aim to put debt on a firmly declining path while supporting long-term growth and safeguarding social needs.

“The UK has made good progress in strengthening the resilience of its banks and financial sector through its newly-established regulatory architecture. Such actions will help ensure its financial sector remains a global public good.

“I am pleased that the UK authorities remain committed to the implementation of domestic and global regulatory reforms. Strengthened, independent and well-resourced supervision will ensure that the financial sector serves the needs of the economy, and that the UK will remain a key hub for global finance.

“Progress has been made on international coordination and consistency on national structural banking reforms, cross-border resolution and derivative rules. But the pace is very slow.

“It remains essential to deliver global financial stability without fragmentation. Through their work with global standard setters the UK authorities can help move international regulatory reforms and supervisory actions in the right direction.



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