Transcript of the UK Article IV Mission Concluding Press Conference with David Lipton
IMF News, May 22, 2013
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- Published: May 22, 2013
Overview and context
- Event: IMF Article IV Consultation press conference hosted at the UK Treasury.
- Date: May 22, 2013.
- Participants: UK Chancellor George Osborne; David Lipton, First Deputy Managing Director of the IMF, and IMF mission team.
- Framing: Five years into the global financial crisis; UK especially affected due to its role in the global financial system. IMF conducted a two-week in-depth Article IV mission to assess UK policies and outlook.
Assessment of the UK economy — key findings
- Recovery status:
- "Durable economic recovery has not yet taken hold."
- "Recent data suggests some improvement in economic and financial conditions" but recovery "has a way to go."
- Labor and investment:
- "Investment has been persistently weak."
- "Unemployment, especially among young people, is high."
- Financial intermediation:
- "Credit intermediation is not adequate as balance sheets are still impaired."
- Banking system: "a fairly concentrated banking system with a large fraction of assets remaining in the hands of a small number of banks."
- Output gap:
- IMF estimate cited of "about a four percentage point output gap."
- Projection on present trajectory: "that would only be halved by the end of the five-term medium-term framework."
- Risks from prolonged slack:
- "The economy may lose some of its capacity permanently."
- "People out of work become less employable" and "the absence of investment leaves you with a smaller stock of capital."
Multipronged policy strategy recommended
- Overarching approach:
- A multipronged strategy spanning monetary, financial sector, fiscal, and structural policies to restore growth momentum and rebalance the economy.
- No single "silver bullet"; policies must be coordinated.
- Monetary policy:
- Recommendation: "monetary policy should remain accommodating and provide assistance to households and investors that rates will be kept low until recovery achieves full momentum."
- Communication: central bank should consider forward-oriented communication to strengthen policy impact; exact communication form left to central bank discretion.
- Note: "monetary policy impact is diminishing over time" and transmission is impaired by weak banks.
- Financial sector policy:
- Priority: accelerate balance-sheet repair of major banks to remove supply-side constraints on lending, notably to SMEs.
- For publicly supported banks: "a clear strategy is needed with a view to returning them to private ownership in a shape to resume lending activity."
- Sovereign backstop: "If a sovereign backstop is required to meet a capital shortfall ... that should be provided, as it would have a high multiplier in terms of economic growth."
- Recapitalization stance: public sector involvement is acceptable if private recapitalization cannot be achieved and if done within a sound recapitalization plan.
- Fiscal policy:
- Use fiscal space to support growth while maintaining credible medium-term consolidation.
- Specific recommendation: "bring forward planned capital spending" to offset near-term drag from discretionary measures.
- Fiscal neutrality over medium term: advance spending within the government's medium-term framework (i.e., front-load investment while keeping overall medium-term plan).
- Acknowledge trade-offs: "higher fiscal support ... is not a straightforward choice as the deficit is still high."
- Structural policies:
- Focus on skills, competitiveness, and accelerating large infrastructure projects.
- Echoes recommendations of the LSE Growth Commission and the Heseltine review.
- Housing: balance demand-side measures (e.g., help-to-buy) with supply incentives to avoid excessive house-price increases; encourage development of land held for capital appreciation.
Quantitative and programmatic specifics cited
- Infrastructure pipeline: government "has a roster of about 300 billion pounds of infrastructure projects" under consideration.
- Fiscal drag example: reference to "the full 10 billion pounds worth of drag this year from the fiscal consolidation" raised in Q&A.
- Infrastructure multiplier: IMF view that infrastructure spending likely yields "probably a multiplier of 1, possibly higher."
- Output gap estimate: "about a four percentage point output gap."
- Timeframe references:
- "five-term medium-term framework" (used in projection context).
- "first year at the front end" for accelerating some infrastructure investments like social housing and school repairs.
Policy sequencing and interactions emphasized
- Monetary policy effectiveness depends on parallel financial-sector repair to restore bank lending capacity.
- Fiscal front-loading of capital projects can be fiscally neutral over the medium term yet provide near-term demand support.
- Private sector participation is important in selecting and financing infrastructure projects to maximize impact.
- Continuous, year-by-year reassessment is recommended: "we tend to take a country-by-country, year-by-year approach to making such assessments."
Risks of inaction and scenarios
- If recommendations are not adopted:
- Prolonged high unemployment and persistent output gap.
- Potential permanent loss of productive capacity.
- Continued weak investment and impaired credit intermediation.
- If recommendations are implemented:
- Front-loaded infrastructure and supportive measures could "offset the drag" from discretionary fiscal tightening and boost growth and private-sector expectations.
- Public recapitalization of banks, if needed and well designed, could have a "high multiplier in terms of economic growth."
Notable Q&A highlights
- On how much capital spending to bring forward:
- IMF suggests advancing projects that can start quickly (e.g., social housing, repairing schools), noting feasibility varies across the 300 billion pounds roster.
- Exact feasible amounts would require technical review of the infrastructure roster.
- On fiscal pacing:
- IMF suggests adjusting timing within the medium-term framework to be more supportive at the front end while preserving medium-term credibility.
- On house-price risks from demand-side stimulus:
- Need to calibrate demand measures and add supply-side incentives (e.g., measures to encourage development of underutilized land).
- On bank support mechanics:
- No specific recapitalization design proposed during the press conference; principle is that capital must be provided if private solutions are insufficient.
Transcript of the UK Article IV Mission Concluding Press Conference with David Lipton, May 22, 2013.