IMF Executive Board Concludes 2020 Article IV Consultation with United Kingdom
IMF News, December 18, 2020
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- Published: December 18, 2020
Overview
- The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with United Kingdom.
- Key pre-pandemic challenges noted: agreeing to a post-Brexit trade deal with the EU, weak productivity growth, large regional disparities in income, population aging (and its impact on pension spending), and the need to strengthen climate policies.
- Pre-pandemic strengths noted: economy operating at full employment, inflation close to target, household and corporate debt burdens had fallen substantially since 2009, banking system well-capitalized and liquid, and fiscal adjustment had set debt on a declining trajectory with fiscal space available.
Economic impact of the pandemic and policy response
- The pandemic caused a significant human and economic toll; a spring lockdown, subsequent restrictions, and a second lockdown (announced in early November) mitigated a more tragic health outcome.
- Health restrictions caused a sharp decline in GDP in Q2 2020.
- A coordinated fiscal, monetary, and financial sector policy response helped hold down unemployment and insolvencies.
- Despite a summer rebound as the economy re-opened, growth for 2020 will likely be around -11.2 percent, with core inflation below target, and the current account deficit subdued at about 2½ percent.
Outlook and projections
- Near-term headwinds: the second lockdown, prolonged social distancing, and frictions from implementing the new Brexit trade regime; these are expected to generate strong headwinds through mid-2021 (and for even longer if a free trade agreement cannot be reached).
- Recovery path:
- GDP projected to rebound and grow by 5.7 percent in 2021 and about 4.5 percent in 2022.
- By 2025, the level of output is projected to recover to about 5 percent below the pre-Covid trend, reflecting weaker investment and higher unemployment in the interim.
- Risks: predominantly to the downside, centered on the pace at which the impact of the pandemic fades and the degree of balance sheet damage sustained by households and small and medium enterprises.
- Mitigation: faster vaccine deployment could mitigate risks.
Executive Board Assessment and policy guidance
- Directors commended the authorities’ strong and coordinated policy response and underscored that policy support will remain essential to see the economy through the pandemic and the transition to the post-Brexit trade regime.
- Fiscal policy:
- Should continue to fully fund targeted pandemic support programs.
- Be prepared to respond if further downside risks materialize; welcomed authorities’ flexibility.
- As the pandemic subsides, targeted fiscal support using available space could help invigorate growth.
- Welcomed plans to expand public investment and recommended assessing the adequacy of the public investment management framework.
- A gradual fiscal consolidation to contain the debt burden over the medium term should only start once the private sector is durably leading the recovery.
- Merit seen in a full expenditure review to prepare for consolidation.
- Several Directors suggested being open to consider some adjustment to major tax rates and exploring fiscal measures in support of the climate agenda.
- Monetary policy and financial sector:
- Monetary policy should remain accommodative; Directors welcomed the Bank of England’s commitment to increase government bond purchases.
- A negative policy rate could be part of the toolkit but requires further study on deployment.
- Stressed the role of the financial system in funding the recovery; while banks have sizable buffers, uncertainty related to SME stress and commercial property prices calls for continued close supervision.
- Structural and social policies:
- Adjustment to the pandemic and Brexit will require some reallocation of labor and capital.
- Seen room to further strengthen the social safety net, enhance active labor market policies, streamline insolvency procedures, and unlock equity finance.
- Institutional frameworks:
- Commended the U.K.’s policy frameworks; suggested considering updates to the fiscal framework where needed once uncertainty abates.
- Whether the monetary framework may need adjustment to address the risk of persistent low inflation merits consideration.
- The 2021 FSAP will be an opportunity to consider emerging financial sector challenges.
- Brexit-related guidance:
- Agreement on a new post-Brexit trade regime would benefit both the U.K. and the EU and reduce outward spillovers.
- Urged completion of trade infrastructure preparations and called for contingency plans if no agreement is reached; stronger policy support would be important in that scenario.
United Kingdom: Selected Economic Indicators, 2015–21 (selected rows and exact values preserved)
- Real GDP (change in percent)
- 2015: 2.4
- 2016: 1.7
- 2017: 1.3
- 2018: -11.2
- 2019: 5.7
- 2020: (projections field shows) Private final domestic demand row indicates -14.8 for 2020; Real GDP row lists -11.2 for 2020 and 5.7 for 2021
- Private final domestic demand
- 2015: 3.7
- 2016: 1.4
- 2017: 1.2
- 2018: 0.9
- 2019: -14.8
- 2020: 4.5 (2021 projection)
- CPI, end-period
- 2015: 0.1
- 2016: 3.0
- 2017: 2.3
- 2018: 0.7
- 2019: (blank in source)
- Unemployment rate (in percent) 1/
- 2015: 5.4
- 2016: 4.9
- 2017: 4.4
- 2018: 4.1
- 2019: 3.8
- 2020: 4.8
- 2021: 7.3
- Gross national saving (percent of GDP)
- 2015: 12.7
- 2016: 12.4
- 2017: 14.4
- 2018: 14.1
- 2019: 14.0
- 2020: 12.5
- Gross domestic investment (percent of GDP)
- 2015: 17.7
- 2016: 17.8
- 2017: 18.2
- 2018: 18.3
- 2019: 17.0
- 2020: 16.8
- Public sector overall balance (fiscal year, percent of GDP)
- 2015: -4.2
- 2016: -2.6
- 2017: -1.8
- 2018: -2.5
- 2019: -19.1
- 2020: -7.6
- Public sector cyclically adjusted primary balance (staff estimates)
- 2015: -2.4
- 2016: -1.1
- 2017: -0.9
- 2018: -0.5
- 2019: -13.9
- 2020: -4.0
- Public sector net debt 2/
- 2015: 78.7
- 2016: 77.6
- 2017: 81.1
- 2018: 79.9
- 2019: 84.6
- 2020: 106.4
- 2021: 109.9
- M4 (end-period, 12-month percent change)
- 2015: 0.3
- 2016: 6.3
- 2017: 2.1
- 2018: …
- Net lending to private sector
- 2015: 2.8
- 2016: 3.6
- 2017: 3.2
- Three-month interbank rate (percent; year average)
- 2015: 0.6
- 2016: 0.5
- 2017: 0.4
- 2018: 0.8
- Ten-year government bond yield
- 2015: 1.9
- 2016: 1.5
- Current account balance (percent of GDP)
- 2015: -5.0
- 2016: -5.4
- 2017: -3.8
- 2018: -3.7
- 2019: -4.3
- Trade balance
- 2015: -1.5
- 2016: -1.4
- 2017: -1.2
- 2018: -1.7
- Net exports of oil
- 2015: -0.3
- 2016: -0.2
- 2017: 0.0
- Exports of goods and services (volume change in percent)
- 2019: 2.7
- 2020: -13.5
- Imports of goods and services (volume change in percent)
- 2015: 3.9
- 2016: 2.6
- 2017: 3.3
- 2018: -20.2
- 2019: 12.8
- Terms of trade (percent change)
- 2015: 0.2
- 2016: -0.1
- 2017: -0.7
- FDI net
- 2015: -3.6
- 2016: -11.0
- 2017: -0.8
- 2018: -3.1
- 2019: -1.6
- 2020: 1.0
- Reserves (end of period, billions of US dollars)
- 2015: 130.5
- 2016: 136.6
- 2017: 158.6
- 2018: 176.6
- 2019: 182.7
- Exchange rate regime: Floating
- Bilateral rate (September 8, 2020)
- US$1 = £0.7679
- Nominal effective rate (2010=100, year average) 3/
- 2015: 113.4
- 2016: 102.3
- 2017: 96.3
- 2018: 97.9
- 2019: 97.7
- Real effective rate (2010=100, year average) 3/
- 2015: 113.7
- 2016: 102.4
- 2017: 97.1
- 2018: 98.8
- 2019: 98.3
Key policy recommendations (bulleted)
- Continue to fully fund targeted pandemic support programs and remain prepared to respond to further downside risks.
- Use available fiscal space for targeted support and expand public investment; assess the public investment management framework.
- Defer gradual fiscal consolidation until the private sector is durably leading the recovery; conduct a full expenditure review to prepare for consolidation.
- Consider adjustments to major tax rates and fiscal measures supporting the climate agenda.
- Keep monetary policy accommodative; consider increased government bond purchases and further study on the role and deployment of a negative policy rate.
- Maintain close supervision of banks given SME stress and commercial property price uncertainty.
- Strengthen the social safety net, enhance active labor market policies, streamline insolvency procedures, and unlock equity finance to facilitate reallocation of labor and capital.
- Complete trade infrastructure preparations and have contingency plans if no post-Brexit agreement is reached; be ready to pursue stronger policy support in that scenario.
IMF Communications Department, Press Release No. 20/379, December 18, 2020.
