2017 UK Article IV Press Conference: Opening Remarks by IMF Managing Director Christine Lagarde

IMF News, December 20, 2017

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Remarks delivered at the conclusion of the IMF’s annual Article IV consultation with the UK.
Acknowledgement of the UK authorities’ active engagement in the consultation process.
Recent major developments: voters’ decision to withdraw from membership in the European Union and the government’s decision to invoke Article 50.
Note: UK not expected to leave the EU until 2019.

Global forecast from last October: 3.6% growth this year, and 3.7% next year.
UK-specific developments since May of last year:
- Significant depreciation of sterling following the referendum has pushed inflation over 3 percent, squeezing real incomes and private consumption.
- Companies are delaying some investment decisions until they have greater clarity about post-Brexit trade rules.
GDP growth projections and recent comparators:
- Projected GDP growth of 1.6 percent this year.
- Down from 1.8 percent last year and 2.3 percent in 2015.
- Growth is projected to remain around 1½ percent next year, as uncertainty about the shape of Brexit persists and inflation remains above target.

Progress and current fiscal position:
- Significant progress made in reducing the deficit since the global financial crisis.
- Public debt remains high, at 87 percent of GDP.
Policy recommendation:
- Continued deficit reduction is critical to create further room to respond to future shocks.
Long-term fiscal pressures:
- Population aging expected to lead to material increases in spending on health care, pensions and long-term care.
- Productivity growth has been slow.
- A slowly growing economy implies fewer resources to meet increased spending.
Risks:
- Challenges may worsen if trade barriers further reduce productivity.
- Future difficult decisions may be required about the size of the public sector and the mode of delivery and financing of public services.

Role: Structural reforms are important for raising productivity.
Identified gaps:
- UK goods and labor markets are very competitive, but the UK underinvests in infrastructure and innovation and falls short in human capital development.
Recent government initiatives praised:
- Increasing public sector investment.
- Reforming technical education.
Further recommended reforms:
- Easing planning restrictions.
- Reforming property taxes to boost housing supply.

Stance:
- Agreement with the Bank of England that tightening should proceed at a gradual pace.
Rationale:
- Gradual tightening will return inflation to target as the impact of the depreciation of sterling fades.
Conditional recommendation:
- A faster rate of tightening may be called for if low unemployment results in too rapid wage growth.

Status of banks:
- UK banks have strengthened steadily since the financial crisis and are in a far better position today with respect to capital, leverage and liquidity.
Preparations for Brexit:
- Primary responsibility for readiness lies with banks and other financial institutions themselves.
- UK authorities have been proactive in engaging with institutions to ensure they are well-prepared.
Cross-border cooperation:
- Given the complexity of the UK financial system and its high degree of global integration, continued close cross-border regulatory and supervisory cooperation between the UK, EU and other relevant authorities is essential to manage risks.

Progress welcomed:
- Recent progress in UK–EU negotiations allows discussions to move to issues related to the future trading relationship and a transition period.
Policy position:
- The ultimate decision on the form of the UK–EU relationship is for the UK and EU to decide.
- An agreement that minimizes the introduction of trade barriers and allows adequate time to implement changes would best support stability and growth.
Tasks and challenges identified:
- Negotiating a new trade deal with the EU.
- Creating domestic capacity to take over new responsibilities.
- Negotiating new trade arrangements with about 60 countries to replace those that came with EU membership.
- Translating many thousands of pages of EU law into UK statutes.
Recommendation on transition:
- Encourage the UK and EU to reach agreement soon on transitional arrangements that would apply for a period after the UK’s departure to provide households and firms with greater confidence toward the March 2019 exit date.
Additional details:
- More details and recommended policies are contained in the mission’s Concluding Statement.

International Monetary Fund — Opening remarks delivered December 20, 2017