IMF Executive Board Concludes 2018 Article IV Consultation with the United Kingdom
IMF News, November 14, 2018
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- Published: November 14, 2018
Macroeconomic outlook and growth
- Output continues to grow at a moderate pace.
- Growth is projected to remain around 1½ percent going forward under a baseline scenario that assumes a smooth transition to a broad free trade agreement with the EU.
- The most significant risk to the forecast is the possibility of leaving the EU without an agreement, which would have a large negative impact on growth, especially if it happens in a disorderly manner and without a transition period.
- Slack in the economy is limited and unemployment has declined to historically low levels.
Drivers and constraints on activity
- Since the referendum on EU membership, business investment has been depressed by uncertainty about the future relationship between the UK and EU and expectations of higher future trade costs.
- Consumption has been constrained by slow real income growth.
- Weaker domestic demand has been partially offset by stronger net exports, underpinned by strong external demand and weaker sterling.
- Potential growth has slowed due to slow capital accumulation, decline in net migration from the European Union (EU), and persistent low productivity.
Monetary and financial conditions
- Monetary policy has tightened, with a cumulative 50 basis point increase in Bank Rate over the last year.
- Financial conditions remain relatively easy, with mortgage rates at record low levels and total credit growing in line with GDP.
- Directors considered that as the impact of past sterling depreciation on prices continues to fade, the pace of further monetary policy tightening should be gradual and data‑dependent in an environment of greater‑than‑usual uncertainty.
- Directors concurred that the policy rate should continue to be used as the main monetary policy instrument.
- Once the Bank of England begins unwinding its balance sheet, this process should proceed in a gradual and predictable manner.
- Directors welcomed the authorities’ readiness to take actions to minimize any market disruptions, including by ensuring the financial system has adequate liquidity.
Fiscal position and public finances
- Sustained fiscal consolidation has brought the public deficit below two percent of GDP for the first time in 15 years.
- Directors commended steady progress in reducing fiscal deficits over the last decade and emphasized that continued fiscal consolidation is critical to build buffers against future shocks, in a context of relatively high public debt, a closed output gap, and significant medium‑term spending pressures related to population aging.
- Directors noted that revenue reforms are likely to be needed to create fiscal space and improve efficiency.
- In the case of a disorderly Brexit, judicious use of the flexibility embedded in the fiscal framework may be appropriate to support the economy; any easing of fiscal policy should be temporary, limited, and anchored by credible medium‑term consolidation plans.
Financial sector stability and regulatory cooperation
- Directors encouraged the authorities to maintain robust prudential and supervisory standards after Brexit.
- They welcomed efforts to proactively help financial institutions prepare for EU exit, including commitment to creating temporary permission and recognition regimes that would guarantee EU financial institutions the ability to continue to operate in the United Kingdom for a limited period after departure.
- Directors called on all parties to work together to mitigate transition and spillover risks related to changes in regulatory regimes and responsibilities.
- They underscored the importance of continued close cross‑border cooperation in the future to maintain financial system stability.
Structural and policy recommendations
- Sustained policy efforts are needed to enhance productivity, inclusiveness, and external competitiveness.
- A comprehensive strategy is underway to boost productivity based on supporting investment in physical and human capital.
- Directors welcomed recent initiatives to support infrastructure investment and human capital.
- Greater use of active labor market policies, including support for re‑training, could facilitate labor reallocation across regions and sectors after Brexit.
- Directors welcomed ongoing efforts to enhance corporate transparency and looked forward to sustained progress in strengthening the effectiveness of enforcement of measures against foreign bribery.
Executive Board key assessments and actions urged
- Directors emphasized the importance of a timely agreement with the EU, accompanied by an implementation period to avoid a cliff edge exit in March 2019 and to allow firms and workers time to adjust.
- An agreement that minimizes barriers to trade in goods and services would best support economic activity and limit disruptions and global spillovers.
- Preparations should continue for all possible scenarios, including a “no deal” Brexit.
- In the event of a disorderly Brexit, policies should seek to safeguard macroeconomic and financial stability.
United Kingdom: Selected Economic Indicators, 2014–19 (selected items)
- Real GDP (change in percent): 2014: 2.9; 2015: 2.3; 2016: 1.8; 2017: 1.7; 2018: 1.4; 2019 (Projections): 1.5
- Private final domestic demand (change in percent): 2014: 2.8; 2015: 3.0; 2016: 2.1; 2017: 1.1
- CPI, end-period: 2014: 1.0; 2015: 0.1; 2016: 1.2
- Unemployment rate (in percent): 2014: 6.2; 2015: 5.4; 2016: 4.9; 2017: 4.4; 2018: 4.1; 2019 (Projections): 4.2
- Gross national saving (percent of GDP): 2014: 12.3; 2015: 12.0; 2016: 13.6; 2017: 13.7; 2018: 14.0
- Gross domestic investment (percent of GDP): 2014: 17.3; 2015: 17.2; 2016: 17.4
- Public sector overall balance (fiscal year, percent of GDP): 2014: -4.9; 2015: -3.8; 2016: -2.3; 2017: -1.9; 2018: -1.5
- Public sector cyclically adjusted primary balance (staff estimates, percent of potential output): 2014: -2.7; 2015: -2.0; 2016: -0.6; 2017: -0.1; 2018: -0.3; 2019 (Projections): 0.0
- Public sector net debt: 2014: 82.6; 2015: 82.3; 2016: 85.2; 2017: 85.3; 2018: 85.5; 2019 (Projections): 84.7
- M4 (end-period, 12-month percent change): 2014: -1.1; 2015: 0.2; 2016: 3.8
- Three-month interbank rate (percent; year average): 2014: 0.5; 2015: 0.6; 2016: 0.4
- Ten-year government bond yield (percent; year average): 2014: 2.6; 2015: 1.9; 2016: 1.3
- Current account balance (percent of GDP): 2014: -5.2; 2015: -3.5; 2016: -3.2
- Trade balance (percent of GDP): 2014: -1.6; 2015: -1.4; 2016: -1.2; 2017: -1.0; 2018: -0.9
- Net exports of oil (percent of GDP): 2014: -0.4; 2015: -0.5
- Exports of goods and services (volume change in percent): 2014: 5.5
- Imports of goods and services (volume change in percent): 2015: 3.3; 2016: 3.2
- FDI net (percent of GDP): 2014: -5.8; 2015: -3.7; 2016: -8.2; 2017: 3.1
- Reserves (end of period, billions of US dollars): 2014: 109.1; 2015: 130.5; 2016: 136.6; 2017: 158.6
- Fund Position (as of May 31, 2016): Holdings of currency (in percent of quota): 82.5; Holdings of SDRs (in percent of allocation): 70.2; Quota (in millions of SDRs): 20,155
- Exchange rate regime: Floating
- Bilateral rate (October 5, 2018): US$1 = £0.7832
- Nominal effective rate (2010=100, year average): 2014: 107.2; 2015: 114.2; 2016: 101.8; 2017: 95.9; 2018: 95.5
- Real effective rate (2010=100, year average): 2014: 109.7; 2015: 116.8; 2016: 104.3; 2017: 99.1; 2018: 99.0
IMF Executive Board Concludes 2018 Article IV Consultation with the United Kingdom (Press Release No. 18/423), November 14, 2018.
