United Kingdom: Staff Concluding Statement of the 2025 Article IV Mission
IMF News, May 27, 2025
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- Published: May 27, 2025
Economic outlook
- Recovery underway after a slowdown in 2024 H2; high frequency indicators have shown signs of improvement.
- Growth projections:
- 1.2 percent in 2025.
- 1.4 percent in 2026.
- Medium-term potential growth forecast at 1.4 percent (relative to the pre-GFC trend, growth is expected to remain subdued due to weak productivity).
- Assumptions and impacts:
- Forecast assumes global trade tensions lower the level of UK GDP by 0.3 percent by 2026 due to persistent uncertainty, slower activity in trading partners, and the direct impact of remaining US tariffs on the UK.
- Monetary easing, positive wealth effects, an uptick in confidence, and the October budget boost to public spending are expected to bolster private consumption and support growth.
- Authorities’ structural reforms (including planning reform) and increased infrastructure investment could raise potential growth if properly implemented.
- Risks to growth:
- Downside risks include tighter-than-expected financial conditions, rising precautionary saving, and persistent global trade uncertainty that could weaken global activity, disrupt supply chains, and undermine private investment.
Fiscal policy
- Assessment of fiscal strategy:
- The authorities’ fiscal strategy for the next five years appropriately supports growth while safeguarding fiscal sustainability.
- New spending plans are described as credible and growth-friendly; expected to provide a medium-term economic boost that outweighs the impact of higher taxation.
- As revenue is projected to increase, deficits are set to decline and stabilize net debt.
- Implementation risks and recommendations:
- Significant risks to successful implementation stem from global uncertainty, volatile financial market conditions, and the challenge of containing day-to-day spending.
- Staff recommends staying the course on current plans and implementing additional revenue or expenditure measures as needed if shocks arise, to maintain compliance with fiscal rules.
- Longer-term fiscal pressures:
- Under current policies, staff analysis suggests spending to be around 8 percent of GDP higher by 2050, mainly due to additional outlays on health and pensions from population ageing.
- Limited space to finance this spending through extra borrowing given high debt and elevated borrowing costs; unless revenue is increased (for which staff notes there is scope), tough decisions on spending priorities and the role of the state will be needed.
- Fiscal framework refinements to improve predictability:
- Recent reforms (new current balance rule, debt rule, transition to a three-year rule horizon) enhance credibility and effectiveness.
- Staff suggests options to reduce pressure for frequent fiscal changes:
- De-emphasize point estimates of headroom in OBR assessments of rule compliance.
- Establish a formal process so that small rule breaches do not trigger corrective fiscal action outside the single fiscal event.
- Assess rules only once per year at the time of the fiscal event.
Monetary policy and operations
- Policy stance:
- A gradual and flexible approach to monetary easing is appropriate to support the economy while guarding against inflationary risks.
- The pickup in inflation that began in 2024 is expected to last through the second half of this year, with a return to target later in 2026 as underlying inflationary pressures continue to recede.
- Given still-weak growth, temporary rise in inflation, and high long-term interest rates, staff views the BoE’s gradual pace of easing as appropriate and encourages the MPC to retain flexibility to adjust the stance in either direction.
- Forecasting, communications, and scenarios:
- Staff welcomes the Bernanke Review implementation and the use of scenarios and conditional guidance.
- Recommendations: continue investing in modeling capacity, data, and personnel; tailor scenarios promptly as conditions change; allow interest rates to adjust in scenarios rather than assume they follow current market expectations; MPC members should use central forecast and alternative scenarios more in explaining decisions and views.
- Balance sheet and operational framework:
- Transition to a repo-based framework will mitigate balance sheet risks; QT is conducted gradually and predictably.
- As the balance sheet normalizes, a demand-driven approach with reserves provided mainly through repo operations will reduce BoE market footprint and limit exposure to interest and credit risks, while maintaining monetary control and flexibility for future QE.
- Ongoing review of BoE instruments to consider the relative role of repo operations and asset purchases, and the balance between short and long-term repos.
Financial sector policies
- Banking sector resilience:
- Banking system described as adequately capitalized and liquid with healthy profitability; 2024 desk-based stress test showed capacity to support households and businesses during severe stress.
- Macroprudential settings remain appropriate; indicators of financial vulnerabilities are close to long-term averages despite increased global risks from more volatile asset prices and credit spreads.
- Non-bank sector vulnerabilities and policy work:
- Non-bank sector accounts for over half of UK financial assets; significant progress made assessing and reducing vulnerabilities, but continued domestic and international work is needed.
- The system-wide exploratory scenario (SWES) has improved understanding of linkages and contagion risks.
- BoE’s new repo facility for non-banks aligns with previous AIV recommendations; BoE could consider expanding access to a broader range of non-banks with a large gilt market footprint if they are adequately supervised and regulated.
- Ongoing work with the FSB and closing data gaps are essential to better monitor non-bank leverage, concentration, and liquidity risks.
- Gilt market resilience:
- Recent global bond market turbulence underscores importance of enhancing gilt market resilience.
- Gilt market functioning has remained orderly, but vulnerabilities have risen due to increased supply, reduced demand by more patient investors, greater roles for hedge funds and non-residents, and BoE reducing holdings as part of QT.
- Staff recommends close monitoring, regular stress testing, and engagement with market participants.
- The shift of issuance toward shorter-dated securities for FY2025/26 has been well received.
- Authorities are considering structural resilience measures, such as central clearing for gilt repo transactions.
- Regulatory reform and financial-sector growth:
- Reforms should balance promoting growth with preserving continuity and financial stability.
- Consolidating pension funds could reduce fees and expand access but must guard against unintended side-effects, including reduced competition.
- Staff supports the FPC’s recommendation that the Pensions Regulator have a remit to take financial stability considerations into account to strengthen oversight of the evolving pensions landscape.
Structural policies
- Productivity challenge:
- Persistently weak productivity is the primary obstacle to lifting growth and living standards.
- Decline in trend productivity growth since the Global Financial Crisis has widened the gap with the US; level of UK GDP is around one quarter below the pre-GFC trend.
- Contributing factors include chronic under-investment, low private R&D, limited access to finance for scaling businesses, skill gaps, and deterioration in health outcomes.
- Growth Mission assessment and implementation advice:
- Authorities’ Growth Mission focuses on the right areas, but careful prioritizing and sequencing of policies will be key to success.
- The agenda is ambitious and many reforms remain at formulation and consultation stages; limited fiscal space, reform breadth, and external volatility make sequencing, coherence, and prioritization essential.
- Clear communication and prioritizing early wins are important to build momentum and support.
- Top three binding constraints recommended for priority action:
- Policy stability to support business confidence amid global uncertainty (including efforts to strike trade agreements with the EU, India, and the US).
- Planning reform and complementary public infrastructure projects to lift chronically-low private investment.
- Boosting skills, enhancing health, and incentivizing work to address sectoral shortages and provide the workforce needed by growth industries.
- Role of industrial policy:
- Industrial policy can complement sectoral support, but economy-wide reforms (horizontal reforms) should remain the main tool to boost competitiveness and growth.
- Sectoral interventions should address market failures using evidence-based approaches, rigorous appraisal, strict budgetary limits, prudent risk management, and comprehensive risk reporting.
Concluding note
- The mission thanks the authorities and other counterparts for open discussions, productive collaboration, and constructive policy dialogue.
United Kingdom: Staff Concluding Statement of the 2025 Article IV Mission — May 27, 2025.