IMF Executive Board Concludes 2024 Article IV Consultation with the United Kingdom
IMF News, July 8, 2024
Source details
- Canonical URL
- IMF Executive Board Concludes 2024 Article IV Consultation with the United Kingdom
Other formats
Bibliographic details
- Published: July 8, 2024
Outlook: growth and inflation
- "The economy is approaching a soft landing, with growth recovering faster than expected after a mild technical recession in 2023."
- Growth projections:
- Real GDP growth (%): 0.1 (2023, Est.); 0.7 (2024, Projections); 1.5 (2025, Projections); 1.7 (2026, Projections)
- Inflation dynamics:
- Inflation, annual average (%): 7.3 (2023); 2.7 (2024); 2.1 (2025); 2.0 (2026)
- Inflation is forecast to temporarily rise from "around 2 percent presently to 2.5 percent by end-2024, due to regulated energy price base effects, before returning durably to 2 percent in early 2025."
- Drivers:
- Disinflation buoys real incomes, monetary policy easing, and more accommodative financial conditions underpin the projected acceleration to 1.5 percent in 2025.
- Rapid fall in inflation from last year’s double-digit levels attributed to reversal of the energy price shock and demand impact of tight monetary policy.
Risks and scenarios
- Risks to growth and inflation are "balanced."
- Short-term scenarios:
- Downside: growth could be lower if the anticipated pick-up in consumption from current weak levels does not materialize.
- Upside: growth could be higher if there are stronger-than-expected second round effects from falling energy prices (this also represents a downside risk to inflation).
- Alternative risk: stronger wage pressures could lend greater persistence to services inflation, with possible repercussions for growth as monetary policy adjusts.
- Medium-term risk:
- Key downside risk is that productivity and labor supply disappoint relative to expectations.
- Upside potential from "bold implementation of ambitious structural reforms and AI adoption."
Executive Board assessment — monetary policy
- Directors recognized the economy is approaching a soft landing and welcomed the rapid decline in inflation since last summer.
- Monetary stance and guidance:
- Directors agreed that with the monetary policy stance reaching a turning point, the risks of premature versus delayed easing should be appropriately balanced.
- They welcomed the Monetary Policy Committee’s meeting‑by‑meeting approach to adjusting rates as appropriate given prevailing uncertainty.
- Noted that "a press conference after each rate decision could be beneficial" for communication, particularly amid divergence from US interest rate paths.
- Emphasized importance of articulating a clear rationale for future Quantitative Tightening (QT) plans as the BoE’s balance sheet approaches its steady‑state size.
- A few Directors supported the high‑level principles proposed by staff for BoE capital policies in future rounds of Quantitative Easing/QT.
- Directors welcomed the BoE’s commitment to act on the recommendations of the Bernanke Review.
Executive Board assessment — fiscal policy
- Directors agreed the main medium‑term challenge is to better account for public spending needs while stabilizing public debt.
- Fiscal stance and recommendations:
- Fiscal policy has remained tight, continuing to target medium-term debt stabilization, although the last two budgets included tax cuts aimed at boosting investment and labor supply.
- Directors observed that absent a substantial boost to potential growth, stabilizing public debt will require difficult tax and spending choices.
- Possible revenue-raising measures noted: stronger carbon taxation and road‑usage taxation, broadening the base of VAT and inheritance tax, reforming capital gains and property taxation.
- On spending, Directors saw scope for savings from reforms to the state pension and noted that any expansion or increase in user charging for public services should effectively protect the vulnerable.
- They encouraged the authorities to strengthen the United Kingdom’s fiscal framework.
Executive Board assessment — structural policies and climate
- Directors emphasized need for more ambitious structural reforms to boost potential growth.
- Recommendations and priorities:
- Support for adoption of a stable, long‑term growth strategy, backed by an independent growth commission.
- Particular focus on easing planning restrictions, upskilling the workforce, and improving health outcomes to boost weak productivity growth.
- Encouraged continued cautious approach to industrial policy and constructive participation in the WTO.
- Welcomed progress in reducing carbon emissions and urged staying the course on climate policy.
- Recommended adequate public investment to support the green transition, stronger feebates to hasten transition to heat pumps and electric vehicles, and strengthening of emissions trading to support the carbon price.
Executive Board assessment — financial sector and supervision
- Directors noted continued resilience of the financial sector and that financial stability risks appear well contained at this time, but careful monitoring is warranted.
- Supervisory priorities and initiatives:
- Ongoing strong supervision of banks and NBFIs encouraged.
- Welcomed BoE initiatives to mitigate NBFI risks, including the system‑wide exploratory scenario exercise and the design of a backstop lending tool.
- Encouraged continued progress in closing data gaps.
- Welcomed preservation of primacy of financial stability objectives in the Edinburgh reforms but urged continued vigilance.
- Enhancing the effectiveness of the AML/CFT supervisory regime remains important.
Structural headwinds and labor market
- Longer-term growth prospects subdued due to:
- Weak labor productivity growth.
- Population aging.
- "Somewhat higher than expected inactivity levels due to long term illness, only partly offset by higher migration numbers."
- Elevated pressures on public services, notably in health, amidst ongoing industrial action over pay.
- Policy measures to boost productivity have been implemented but "will not be sufficient to lift productivity to close to pre-GFC levels."
- Post‑Brexit context:
- Post‑Brexit uncertainty has continued to ease in context of progress on Irish border arrangements, review of retained EU laws, and resilience in UK services exports.
- UK firms trading with the EU are still adapting to the post‑Brexit arrangement.
United Kingdom: Selected Economic Indicators
- Population (million): 68.1
- Per capita GDP (US$): 49,049
- Key export markets: Euro area (36%); US(21%)
- Output
- Real GDP growth (%): 0.1 (2023, Est.); 0.7 (2024, Projections); 1.5 (2025, Projections); 1.7 (2026, Projections)
- Unemployment
- Unemployment (%): 4.0 (2023, Est.); 4.2 (2024, Projections); 4.1 (2025, Projections)
- Prices
- Inflation, annual average (%): 7.3 (2023); 2.7 (2024); 2.1 (2025); 2.0 (2026)
- Inflation, end-of-period (%): 2.5 (2024)
- Public sector finances (fiscal year)
- Revenue (% GDP): 40.6 (2023); 40.3 (2024); 40.5 (2025)
- Expenditure (% GDP): 44.8 (2023); 43.7 (2024); 43.5 (2025); 43.4 (2026)
- Public sector overall balance (% GDP): -4.2 (2023); -3.4 (2024); -3.2 (2025); -2.9 (2026)
- Public sector cyclically adjusted primary balance (staff estimates): -1.0 (2023); -0.7 (2024); -0.1 (2025)
- Public sector net debt (excl. BoE) 2/: 89.2 (2023); 91.6 (2024); 93.1 (2025); 94.5 (2026)
- Money and Credit
- Broad money (% change): -0.9 (2023)
- Credit to the private sector (% change): 0.2 (2023)
- 3-month interbank rate (%): 5.0 (2023)
- Balance of Payments
- Current account balance (% GDP): -3.3 (2023); -3.5 (2024)
- Reserves (end-of-period, billions of US dollars): 190.5 (2023)
- Net international investment position (% GDP): -30.7 (2023)
- Exchange Rates
- REER (% change) 1/: (data not shown in table)
- Notes:
- Sources: Bank of England; HM Treasury; IFS; INS; ONS; and IMF staff estimates.
- 1/ Based on relative consumer prices. An increase denotes an appreciation.
- 2/ Public sector net debt is defined as public sector gross debt minus liquid assets held by general government and non-financial public corporations. It excludes Bank of England operations. The fiscal year begins in April.
IMF Executive Board press release, July 8, 2024.