Transcript of IMF Managing Director’s Questions and Answers on the 2021 UK Article IV and Financial Sector Assessment Program Concluding Statement
IMF News, December 15, 2021
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- Published: December 15, 2021
Omicron, inflation, and near-term monetary policy
- IMF projects UK inflation will pick up to five and a half percent in 2022.
- Supply-chain disruptions are estimated to have a cost of about one percent for inflation this year; additional disruptions from Omicron could add to inflationary pressure.
- Alternative channel: if Omicron reduces mobility and consumer confidence, the effect could be disinflationary; net impact remains uncertain and requires weeks of epidemiological and economic data for a clearer assessment.
- Managing Director: Bank of England needs to "calibrate the response" taking into account inflationary pressures and risks to growth; recent Bank decisions described as exercising "sound judgment."
- Projection on inflation trajectory: after peaking at five and a half percent, inflation is expected to recede to two percent by the end of next year and early into the following year.
Economic impact of Omicron and policy deployment
- Known characteristics: Omicron is highly transmissible; evidence on severity and hospitalization impact is mixed across locations.
- Three central unknowns to monitor:
- Impact on mobility and resulting restrictions.
- How fiscal and other policy space should be deployed depending on severity.
- Degree to which supply chains will be further interrupted.
- Policy guidance:
- Prioritize vaccinations globally and domestically to support higher economic functioning.
- Use targeted fiscal support proportional to the degree of restrictive measures; full lockdowns like 2020 are considered "highly unlikely" given vaccination, testing, tracing, masks, and social distancing.
- Maintain agility in policy and calibrate support to vulnerable people and firms if more restrictive measures affecting contact‑intensive sectors become necessary.
Vaccination goals and global economic stakes
- IMF-endorsed vaccination targets: vaccinate 40 percent of the population in our countries by the end of this year, and vaccinate 70 percent by mid-next year.
- Current status: progress has improved since earlier months, with upticks even in low-income countries, but in "too many places" the 40 percent target will not be met.
- Economic gains from mass vaccination: IMF states that massive global vaccination would produce between now and 2025 additional output of five point three trillion dollars and a "very significant increase in tax revenues."
- Cost of failing to vaccinate: continuing COVID impacts could result in a loss of way over five trillion dollars between now and 2025.
- Policy recommendation for surplus vaccine stocks (UK): do not hold excess doses; send extra vaccines abroad to help curb the pandemic.
UK medium-term growth, scarring, and labor market
- IMF estimate: UK GDP will settle to about two to two and a half percent below the pre-pandemic trend.
- Scarring estimates:
- One year prior: estimated scarring in the range of four to five percent.
- Current estimate: two to two and a half percent (an improvement and halving of prior scarring estimates).
- Contributing UK-specific factors noted:
- Measurement/accounting issues in UK GDP.
- Tightness in labor markets and improved labor market participation; uncertainty over the relative roles of the pandemic versus Brexit.
- Higher share of contact‑intensive services in the UK economy, making it more exposed to post-pandemic effects.
- Recommendation: pursue medium-term fiscal consolidation via a careful, step‑by‑step approach while retaining agility to respond to downside risks.
Living standards, wages, and inflationary pressures
- Observations:
- Prices are rising faster than wages in the UK, contributing to a living standards concern.
- In the United States, tight labor markets are generating wage pressure, particularly in low‑skilled segments; this has secondary inflationary effects. IMF sees less of this wage‑driven inflation in the UK currently, but it remains important to monitor.
- Policy stance:
- Protect living standards through well‑targeted policies.
- Ensure continued emphasis on vaccinations, testing, tracing, surveillance, and expanded treatments to support both health and economic confidence.
- Monitor global supply‑demand interruptions, which IMF expects to continue into 2022.
Brexit assessment and trade effects
- IMF view:
- Adjustment to Brexit is an ongoing process; it is too early to assess the full economic impact.
- Pandemic complicates separation of Brexit effects from pandemic-driven supply chain and labor disruptions.
- Trade with the EU has dropped significantly; more impacts may follow as new specifics are introduced.
- Some low net migration reflects pandemic effects; the extent attributable to Brexit versus pandemic remains to be determined.
- Global supply‑chain issues (energy prices, microprocessors) are not UK‑EU specific and should not be attributed meaningfully to Brexit.
Financial Sector Assessment Program (FSAP) findings and recommendations
- Systemic assessment:
- Since the 2016 FSAP, the UK banking and insurance system appears "vastly better" on capital, leverage, and solvency metrics.
- The UK financial stability framework established after the global crisis "is working" and has appropriate instruments and international credibility.
- Key risks and gaps identified:
- Growth and materiality of internationally active non‑banking financial activity (large non‑bank sector) warrant urgent attention.
- Data gaps exist for non‑bank activities and need to be plugged.
- The perimeter of surveillance by the Financial Policy Committee should be broadened; bring the Financial Conduct Authority into a more direct role in financial surveillance.
- Multiple simultaneous transitions—LIBOR transition, crypto, technology, climate, Solvency II insurance reform—create complex interactions that require focused attention.
- Brexit and regulatory standards:
- No evidence found of dilution or divergence from international regulatory standards due to Brexit to date; the UK has largely transposed inherited standards.
- Brexit increases the UK's autonomous responsibility in managing financial policies and offers opportunities (e.g., Solvency II review) to tailor frameworks to UK needs.
- Policy recommendations:
- Strengthen data collection and surveillance perimeter to cover non‑bank financial intermediation.
- Maintain focus on financial stability amid overlapping transitions and global interconnections.
- Use FSAP practical advice to monitor effectiveness of green finance policies and integrate climate risks into risk management.
Green finance and London’s role
- Strengths noted for the UK/London:
- Leadership in green policies and issuance of a green bond.
- Advanced sustainable disclosure requirement framework and use of sustainable investment labels.
- Adoption of G20 Principles for Sustainable Finance Classification in market practices.
- IMF advice:
- London is "ahead" but must prudently implement and monitor green finance policies to stay competitive.
- FSAP provides encouragement and practical advice on monitoring effectiveness and integrating green policies into risk management.
Transcript of IMF Managing Director’s Questions and Answers on the 2021 UK Article IV and Financial Sector Assessment Program Concluding Statement