{ "title": "United Kingdom — 2016 Article IV Consultation Concluding Statement of the Mission", "publication": "IMF News, May 13, 2016", "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs051316", "canonical": "https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs051316", "overlayPath": "/en/news/articles/2015/09/28/04/52/mcs051316/index.md", "summary": "Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries).", "publishDate": "2016-05-13", "sections": [ { "heading": "Outlook and risks", "content": "- The Article IV mission took place as the British people prepared for a referendum on EU membership; uncertainty over the referendum outcome is already affecting investment and hiring, with recent surveys of economic activity falling to their weakest levels in three years.\n- Baseline (Remain) forecast:\n - Growth likely to fall below 2 percent for the full-year 2016.\n - Growth expected to rebound in the second half of 2016 and return to an average of around 2¼ percent over the medium term, roughly in line with potential.\n - Inflation currently only ½ percent and expected to revert to target gradually as commodity price effects dissipate and low unemployment pushes up wages.\n- Key ongoing vulnerabilities:\n - Low household saving rate.\n - Still-high levels of household debt.\n - Fiscal deficits, despite substantial reductions since the crisis.\n - Wide current account deficit (widened further in late 2015).\n - Risk that productivity growth may remain low for an extended period (productivity growth slowing).\n- The largest risks relate to the upcoming EU referendum; a Leave vote could crystallize baseline vulnerabilities and create heightened uncertainty." }, { "heading": "Possible economic effects of an exit from the EU", "content": "- Short- to medium-run effects:\n - A vote for exit would precipitate a protracted period of heightened uncertainty, financial market volatility, and a hit to output.\n - Post-decision the UK would need to negotiate withdrawal terms and a new relationship with the EU (unless abandoning single market access and relying on WTO rules, which would significantly raise trade barriers).\n - Ratification of a new deal likely to require unanimous consent of all EU member governments, adding political risk.\n - Existing EU-level agreements cover the UK’s trading relationship with 60 non-EU economies (and prospective arrangements with another 67 countries are in the works); the UK would need to renegotiate these or see them revert to WTO rules.\n - These processes could remain unresolved for years, weighing on investment and economic sentiment and depressing output.\n - Volatility in key financial markets would likely rise.\n- Long-run effects:\n - Most assessments point to sizable long-run losses in incomes from increased barriers that reduce trade, investment, and productivity.\n - Range of estimated long-run losses: from 1½ to as much as 9½ percent of GDP.\n - Any output losses in excess of 1 percent of GDP would result in net fiscal losses, since reduced revenue would more than offset eliminating the UK’s net EU budget contribution of 1/3 percent of GDP.\n - London’s status as a global financial center could be eroded (loss of passporting rights; euro-denominated business may move to the continent).\n- Risk of market anticipation and abrupt reactions:\n - Potential sharp drops in equity and house prices, increased borrowing costs, and sudden stop of investment inflows (e.g., commercial real estate and finance).\n - Current account deficit and reliance on external financing exacerbate these risks.\n - Limited support for net exports from abrupt sterling depreciation would only partly offset GDP losses; inflation could rise well above target for some time.\n - Contagion effects possible, with primary impact domestic.\n- Recent market developments indicative of increased uncertainty:\n - Commercial real estate transactions plunged about 40 percent in Q1 2016.\n - Sterling depreciated by 9 percent in trade-weighted terms since November.\n - Cost of insuring against a UK sovereign default has doubled (albeit from a low level).\n - Cost of insuring against exchange rate volatility around the referendum has spiked.\n- Recommended crisis responses in the event of a Leave vote:\n - Policies should be geared to support stability and reduce uncertainty.\n - Ensure the financial system has adequate liquidity; Bank of England has announced plans to hold additional liquidity auctions in the weeks around the referendum.\n - Consider activating swap facilities with other major central banks if foreign exchange liquidity is short.\n - Macroeconomic policy trade-offs: between stabilizing inflation and stabilizing output and employment; scope to cushion a sharp fall in activity depends on supply/demand assessment and inflation expectations.\n - Develop plans for additional medium-term budget consolidation to offset longer-run adverse fiscal effects." }, { "heading": "Macroeconomic policies", "content": "- Under a Remain baseline, focus should be on promoting steady growth while reducing vulnerabilities via:\n - Fiscal consolidation over the medium term to rebuild buffers—gradual and flexible enough to avoid overburdening monetary policy and to adjust to shocks.\n - Continued accommodative monetary policy to offset fiscal headwinds and support growth.\n - Sufficiently tight macroprudential policies to mitigate financial stability risks associated with high household debt.\n - Structural reforms to boost productivity and incomes.\n- Fiscal policy specifics:\n - The March budget avoided additional near-term tightening to offset lower revenue projections after the Office for Budget Responsibility’s growth downgrade.\n - The budget targeted additional adjustment in the outer years to maintain the government’s target of fiscal balance by FY19/20.\n - Backloading was appropriate given near-term growth weakness and heightened uncertainty.\n - Fiscal policy should remain flexible; in an extended period of sluggish demand and inflation undershooting, authorities should ease the pace of structural adjustment allowed under the fiscal framework.\n - Strengthen pro-growth and pro-stability aspects of consolidation—top priority: further boost infrastructure spending.\n - Funding options for increased infrastructure: scale back distortionary tax expenditures (e.g., nonstandard VAT rates) to increase efficiency and tax neutrality.\n - Enhance financial stability by reducing tax code bias toward debt—e.g., adopt an Allowance for Corporate Equity with offsetting changes in other corporate tax parameters.\n- Monetary policy specifics:\n - Remain accommodative to support growth and ensure inflation returns to target.\n - Core inflation below target and wage growth muted; clearer signs of inflationary pressure should precede any tightening.\n - If risks of prolonged low demand and inflation undershooting rise, monetary policy may need to be eased via policy rate cuts and quantitative easing." }, { "heading": "Financial sector policies", "content": "- FSAP findings and recommendations:\n - Main parts of the UK financial system appear resilient due to post-crisis regulatory reforms: banks have more than doubled their risk-weighted capital ratios from pre-crisis levels, strengthened liquidity, and reduced leverage.\n - Stress tests indicate large banks, insurers, asset managers, and central counterparties appear resilient to shocks.\n - Interconnectedness across sectors could amplify shocks and turn sector-specific distress systemic—priority to strengthen analysis and data on interconnectedness and related risks.\n - Progress toward resolvability of financial firms achieved, but further efforts needed to complete reform agenda and ensure resolvability, especially for systemically important firms.\n - Authorities should develop operational principles for funding firms in resolution and work with international partners on effective resolution regime for systemically significant insurance firms.\n- Supervisory stance:\n - Maintain a robust and intrusive approach to prudential supervision and regulation as the financial cycle matures.\n - Continue prudent review of dividend payouts.\n - Proactively challenge banks’ internal risk-weight models, including through stress testing.\n - Seek international agreement on maintaining effective standards for risk-weights.\n- De-risking and correspondent banking:\n - UK global banks have been reviewing account relationships in response to post-crisis deleveraging, conduct and governance reforms, and reduced risk appetite.\n - Decline in correspondent banking relationships has led to account terminations for categories such as money transmitters and non-profit organizations.\n - Authorities should tailor responses: promote stakeholder dialogue, clarify regulatory expectations, and enhance AML/CFT supervision of money transmitters." }, { "heading": "Macroprudential policy", "content": "- Housing and mortgage markets:\n - Macroprudential tightening between mid-2014 and mid-2015 decelerated markets, but activity has recently increased.\n - House price growth rose to more than three times income growth.\n - Share of new mortgages at high loan-to-income (LTI) ratios is again rising.\n - Recent increased activity may partly reflect a temporary rush before higher transaction taxes on some home purchases effective in April.\n - If trends persist, further macroprudential tightening (e.g., tighter LTI or loan-to-value limits) will be needed later in 2016 to avoid financial stability risks from excessive household indebtedness.\n - The buy-to-let market has grown rapidly and should be subject to macroprudential measures similar to the owner-occupied market following the now-concluded Treasury consultation.\n- Commercial real estate:\n - Monitor risks closely; rapid price growth during 2014-15 has recently paused.\n- Broader macroprudential stance:\n - Remain focused on financial stability and stand ready to act.\n - Communicate objectives and tools of the Financial Policy Committee to a broader audience.\n - Raise the countercyclical capital buffer (CCB) as warranted by credit and asset price conditions; the CCB may well need to be increased later in 2016." }, { "heading": "Structural reforms", "content": "- Housing supply:\n - Top priority: boost housing supply to support growth (construction) and bolster financial stability by increasing affordability and reducing need for high household debt.\n - Recommended measures: ease planning restrictions, mobilize unused publicly-owned land for construction, and reform property taxes to encourage efficient use of housing stock (as recommended in the Mirrlees Review and recent IMF reports).\n- Labor market and inclusion:\n - Expand vocational training, including more high-quality apprenticeships, to reduce double-digit youth unemployment and make growth more inclusive.\n - Increase childcare support to boost labor force participation by single women with children (participation remains below the OECD average despite recent rapid improvement).\n- Corporate transparency and AML/CFT:\n - Government adopted comprehensive reforms: establishment of a register of people with significant control (beneficial ownership) of UK companies and limited liability partnerships; new initiative for automatic sharing of beneficial ownership information between countries.\n - Complementary measures needed: enhance AML/CFT regulatory compliance among trust and company service providers, lawyers, and accountants; strengthen effectiveness of their AML/CFT supervision.\n - Crown Dependencies (CDs) and British Overseas Territories (BOTs) with financial centers committed to establishing central beneficial ownership registries or equivalent systems; government concluded arrangements on effective and unrestricted access to this information by law enforcement and tax authorities.\n - Success depends on ensuring quality of beneficial ownership information (including public accessibility), adequate enforcement, and pursuing similar initiatives for trusts.\n\nUnited Kingdom — 2016 Article IV Consultation Concluding Statement of the Mission (May 13, 2016).\n\n---\n\n Content in this bundle\n\n- Sdn1111pdf (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\n References\n\n- United Kingdom and the IMF\n- Mission Concluding Statements\n- PRESS CENTER\n- Article IV\n- IMF reports\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs051316" } ], "bullets": [ "[Markdown version](/en/news/articles/2015/09/28/04/52/mcs051316/index.md)", "[Structured JSON version](/en/news/articles/2015/09/28/04/52/mcs051316/index.json)", "[Bundle manifest](/en/news/articles/2015/09/28/04/52/mcs051316/bundle-manifest.json)", "Published: May 13, 2016", "The Article IV mission took place as the British people prepared for a referendum on EU membership; uncertainty over the referendum outcome is already affecting investment and hiring, with recent surveys of economic activity falling to their weakest levels in three years.", "Baseline (Remain) forecast:", "Key ongoing vulnerabilities:", "The largest risks relate to the upcoming EU referendum; a Leave vote could crystallize baseline vulnerabilities and create heightened uncertainty.", "Short- to medium-run effects:", "Long-run effects:", "Risk of market anticipation and abrupt reactions:", "Recent market developments indicative of increased uncertainty:", "Recommended crisis responses in the event of a Leave vote:", "Under a Remain baseline, focus should be on promoting steady growth while reducing vulnerabilities via:", "Fiscal policy specifics:", "Monetary policy specifics:", "FSAP findings and recommendations:", "Supervisory stance:", "De-risking and correspondent banking:", "Housing and mortgage markets:", "Commercial real estate:", "Broader macroprudential stance:", "Housing supply:", "Labor market and inclusion:", "Corporate transparency and AML/CFT:", "[Sdn1111pdf (PDF)](/-/media/websites/imf/imported/external/pubs/ft/sdn/2011/_sdn1111pdf.pdf){rel=\"external\" type=\"application/pdf\"}", "[United Kingdom and the IMF](http://www.imf.org/external/country/GBR/index.htm)", "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)", "[PRESS CENTER](http://presscenter.imf.org/)", "[Article IV](https://www.imf.org/external/pubs/ft/aa/aa04.htm)", "[IMF reports](http://www.imf.org/external/pubs/cat/longres.aspx?sk=43723.0)", "[https://www.imf.org/en/home](https://www.imf.org/en/home)" ], "related": [ { "title": "Sdn1111pdf", "role": "document", "sourceUrl": "https://www.imf.org/-/media/websites/imf/imported/external/pubs/ft/sdn/2011/_sdn1111pdf.pdf", "binary": { "path": "/-/media/websites/imf/imported/external/pubs/ft/sdn/2011/_sdn1111pdf.pdf", "mime": "application/pdf" } } ], "alternates": { "markdown": "/en/news/articles/2015/09/28/04/52/mcs051316/index.md", "json": "/en/news/articles/2015/09/28/04/52/mcs051316/index.json", "bundleManifest": "/en/news/articles/2015/09/28/04/52/mcs051316/bundle-manifest.json" }, "generatedAtUtc": "2026-09-26T23:43:49.901Z" }