IMF Survey : UK Economy Rebounding Strongly
IMF News, July 28, 2014
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- Published: July 28, 2014
Growth and headline projections
- The UK economy is projected to grow by 3.2 percent in 2014, up from 1.7 percent in 2013.
- Growth is strong and becoming more balanced, moving beyond initial dependence on consumer spending.
Drivers of the rebound and labor/inflation dynamics
- Primary drivers in 2014: consumption and investment.
- Recent pickup in business investment reflects increased firm confidence.
- Growth has been associated with an increase in consumer confidence and easier credit conditions.
- Strong growth is fueling rapid job creation.
- Inflation is expected to remain low; wage growth has been slow and there remains slack in the economy.
Key risks and vulnerabilities
- Domestic risks:
- Uncertainty about future productivity growth.
- Potential financial risks stemming from the housing market.
- Housing market specifics:
- Housing prices have been growing very rapidly in London, and recently in the rest of UK as well (by about 20 and 10 percent, respectively).
- Rapid house price inflation can contribute to financial risks by encouraging borrowers to take mortgages large relative to incomes, increasing vulnerability to interest rate or income shocks.
- Fundamental driver: inadequate supply of housing.
- External risks:
- The unwinding of unconventional monetary policies in the U.S.
- Weaker-than-anticipated growth in emerging and advanced economies.
- Increased geopolitical tensions.
Policy assessment and recommendations
- Macroprudential and housing policy:
- Authorities are introducing limits on the share of new mortgages banks can grant that feature very high ratios of loan amounts to borrower incomes.
- Banks are being required to run more strenuous tests of loan affordability.
- The IMF agrees these “macroprudential measures” are the appropriate first line of defense and supports early action, while noting effects must be monitored and settings may need modification over time.
- Political consensus to address inadequate housing supply is essential; recommended actions include lifting unnecessary constraints on development, ensuring the tax system encourages efficient land use, and further developing markets for rental housing.
- Monetary policy:
- Monetary policy should stay accommodative for now, given low and stable inflation, slow wage growth, early-stage recovery, and remaining slack.
- Until signs emerge that inflation is rising or that costs are running ahead of productivity growth, monetary policy should continue to support the recovery.
- Fiscal policy:
- The deficit this year is still likely to be very high, at close to 5 percent of GDP.
- The planned pace of deficit reduction this year looks appropriate.
- Over the medium term, fiscal policy should aim to put debt on a firmly declining path while supporting long-term growth through adequate public investment and safeguarding social needs by protecting social expenditure.
- Given the scale of the effort required, authorities should look to measures on both the revenue and expenditure sides.
- Overall policy mix:
- An accommodative monetary policy supporting the recovery, combined with fiscal consolidation aimed at reducing deficits and putting the debt ratio on a downward path, is assessed as appropriate.
IMF Survey: UK Economy Rebounding Strongly, July 28, 2014.