IMF Executive Board Concludes 2021 Article IV Consultation with the United Kingdom
IMF News, February 22, 2022
Source details
- Canonical URL
- IMF Executive Board Concludes 2021 Article IV Consultation with the United Kingdom
Other formats
Bibliographic details
- Published: February 22, 2022
Overview and context
- The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the United Kingdom and discussed findings of the Financial Sector Assessment Program (FSAP) exercise for the United Kingdom.
- Publication schedule: The Staff Report and Financial System Stability Assessment (FSSA) bundle will be followed in early March by publication of the FSAP Technical Notes underpinning the FSSA.
- Context entering 2021:
- Covid cases were spiking again, prolonging health and economic impacts.
- Elements of the post-Brexit framework were left unsettled.
- Policy frameworks were under review, and post-pandemic growth strategy and climate policies had not been spelled out.
- Positive developments included conclusion of the EU-UK Trade and Cooperation Agreement, an ambitious vaccination campaign, and further policy support to contain the pandemic impact.
Near-term and medium-term economic outlook
- 2021 outcomes:
- Growth is estimated to have reached 7.2 percent in 2021.
- Inflation rose to 5.4 percent at end-2021.
- 2022 projection and dynamics:
- Projected growth for 2022: about 4.7 percent.
- Inflation is expected to peak at about 7 percent in the Spring of 2022 before gradually returning to target by 2024Q2.
- Expectation of a mild slowdown in Q1 due to Omicron and associated restrictions, with strong private demand supporting continued growth in 2022.
- Medium-term projections:
- Growth is projected to ease to about 1½ percent.
- Real GDP is projected to settle about 2–2½ percent below its pre-pandemic trend, held back by investment shortfalls in 2020–21 and a less-than-full recovery of labor force participation.
- Risks:
- Near-term risk of higher inflation.
- 2–3 years out, risk shifts to lower growth as policy interventions pull inflation back.
- Major risk from new Covid-19 waves and spillovers from tensions in Eastern Europe.
Monetary, fiscal, and macroprudential policy developments
- Monetary policy:
- With continued above-target inflation readings, the Bank of England (BoE) raised the policy rate in December and again in February.
- Directors welcomed the BoE’s recent policy rate increases and supported moving policy toward a more neutral setting, emphasizing that the pace of withdrawal should weigh risks to inflation and growth.
- Directors emphasized predictability and clear communications about forward guidance.
- Fiscal policy:
- Fiscal policy has rotated towards more targeted support, with a back-loaded medium-term consolidation plan.
- Directors emphasized fiscal policy should retain an important role in responding to large macroeconomic shocks and supported gradual fiscal tightening with well targeted support to protect households from the sharply rising cost of living.
- A few Directors saw scope for moving forward some fiscal consolidation while bolstering spending on Build Back Better priorities later.
- Directors recommended further increasing fiscal automatic stabilizers by formalizing some well-targeted and effective pandemic programs to protect marginalized workers and small businesses.
- Directors welcomed the authorities’ new fiscal rules and noted that a structured and timely commentary on alignment of proposed rules with overarching fiscal objectives would be helpful.
- Macroprudential policy and financial stability:
- Financial stability has been maintained, and macroprudential policies are returning to more standard risk settings.
- The United Kingdom operates a well-functioning financial stability framework with resilient banks and insurers, aligned with global standards.
- Practical use is being made of macroprudential policies.
- Directors called for continued vigilance on housing market risks and the use of macroprudential measures.
Financial Sector Assessment (FSAP) findings and vulnerabilities
- FSAP and FSSA:
- The FSAP assesses stability of the financial system and assists in identifying key sources of systemic risk and policies to enhance resilience.
- The last FSAP exercise took place in 2015–16.
- Key strengths:
- Core part of the UK financial system (banks and insurers) remains resilient.
- Framework helped support safety and soundness through Brexit and the COVID-19 shock.
- Key gaps and risks:
- Data and information gaps exist concerning non-bank financial institutions (NBFI) and their cross-border operations.
- Debtors, creditors, and market intermediaries face interlinked risks from a prolonged pandemic, lingering post-Brexit uncertainties on financial services, and rapidly shifting financial conditions.
- Financial stability is highly sensitive to interconnectedness of markets and cross-border risks.
- Issues related to other ongoing financial sector transitions are starting to pose a challenge for financial stability authorities.
- Recommendations highlighted by Directors:
- Address data and information gaps, expand regulatory perimeters, and enhance international coordination, especially on non-bank financial institutions.
- Continue proactive approaches on the future regulatory framework, LIBOR transition, green finance, and cyber threat related risks.
- Secure institutional safeguards for preserving financial stability and market integrity.
Executive Board assessment and policy recommendations
- Commendations:
- Directors commended the authorities’ strong policy measures and rapid vaccination campaign that helped contain health, economic, and financial impacts of the pandemic.
- Directors commended the authorities’ “Build Back Better: Our Plan for Growth” agenda to facilitate structural transformation for green, inclusive growth.
- Support and emphasis:
- Support for the Bank of England’s rate increases and moving policy toward neutral, with caution on pace.
- Emphasis on predictability and clear communications about forward guidance to improve policy effectiveness.
- Support for gradual fiscal tightening with well targeted support to protect households from rising cost of living.
- Welcome for scaling up public investment and strengthening active labor market policies.
- Encouragement to hone the ambitious Net Zero Strategy as necessary to deliver targets.
- Urged continued engagement on implementing the EU-UK trade agreement to find mutually beneficial solutions.
- Specific director views:
- A few Directors saw scope for moving forward some fiscal consolidation while bolstering Build Back Better spending later; a few questioned political feasibility.
- Directors recommended formalizing well-targeted pandemic programs to enhance fiscal automatic stabilizers.
Selected Economic Indicators (as presented)
- Real Economy (change in percent):
- Real GDP: 2018: 1.7; 2019: -9.4; 2020: 7.2; 2021 (Est.): 4.7; 2022 (Projections): 2.3
- Private final domestic demand: 2018: 1.8; 2019: 1.0; 2020: -10.7; 2021: 4.9; 2022: 7.4
- CPI, period average: 2018: 2.5; 2019: 0.9; 2020: 2.6; 2021: 6.3; 2022: 3.1
- CPI, end-period: 2018: 2.1; 2019: 1.3; 2020: 0.6; 2021: 5.4; 2022: 5.0
- Unemployment rate (in percent) 1/: 2018: 4.1; 2019: 3.8; 2020: 4.5; 2021: 4.3; 2022: 4.2
- Gross national saving (percent of GDP): 2018: 14.0; 2019: 15.3; 2020: 13.8; 2021: 13.3; 2022: 13.6
- Gross domestic investment (percent of GDP): 2018: 17.9; 2019: 18.0; 2020: 16.7; 2021: 17.2; 2022: (not provided)
- Public Finance (fiscal year, percent of GDP):
- Public sector overall balance: 2018: -2.0; 2019: -2.5; 2020: -14.9; 2021: -7.7; 2022: -3.1; 2023: -2.2
- Public sector cyclically adjusted primary balance (staff estimates): 2018: -0.8; 2019: -1.3; 2020: -11.5; 2021: -5.6; 2022: -2.4
- Public sector net debt 2/: 2018: 78.9; 2019: 84.1; 2020: 96.6; 2021: 93.7; 2022: 91.2; 2023: 91.5
- Money and Credit (end-period, 12-month percent change):
- M4 3/: 2018: 13.5; 2019: 6.9; 2021 values are estimated using November data.
- Net lending to private sector 3/: 2018: 3.6; 2019: 3.2; 2020: 3.7; 2021: 3.0
- Interest rates (percent; year average):
- Three-month interbank rate: 2018: 0.7; 2019: 0.8; 2020: 0.3; 2021: 0.1
- Balance of Payments (percent of GDP):
- Current account balance 4/: 2018: -3.9; 2019: -2.7; 2020: -2.6; 2021: -3.4; 2022: -4.7; 2023: -4.3
- Trade balance: 2018: -0.9; 2019: -1.1; 2020: -2.1
- Net exports of oil: 2018: -0.1
- Exports of goods and services (volume change in percent): 2018: 2.8; 2019: 3.4; 2020: -13.9; 2021: -1.4; 2022: 3.9; 2023: 8.5
- Imports of goods and services (volume change in percent): 2018: 2.9; 2019: -15.9; 2020: 2.4; 2021: 9.7; 2022: 7.3
- Terms of trade (percent change): 2018: 0.2; 2019: 1.1; 2020: -0.6; 2021: 0.4
- FDI net 4/: 2018: -0.2; 2019: -1.8; 2020: -3.0
- Reserves (end of period, billions of US dollars): 2018: 176.6; 2019: 182.7; 2020: 186.7; 2021: 203.7
- Exchange Rates:
- Exchange rate regime: Floating
- Bilateral rate (December 31, 2021): USD$1= £0.7420
- Nominal effective rate (2010=100, year average) 3/: 2018: 97.9; 2019: 97.7; 2020: 98.1; 2021: 102.4
- Real effective rate (2010=100, year average) 3/: 2018: 98.8; 2019: 98.4; 2020: 98.6
- Memorandum items:
- Nominal GDP (billions GBP): 2018: 2,174; 2019: 2,255; 2020: 2,153; 2021: 2,333; 2022: 2,591; 2023: 2,736
- Nominal GDP (billions USD): 2018: 2,905; 2019: 2,880; 2020: 2,762; 2021: 3,211
IMF Executive Board Concludes 2021 Article IV Consultation with the United Kingdom, Press Release No. 22/47, February 22, 2022.