{ "title": "United Kingdom: Staff Concluding Statement of the 2023 Article IV Mission", "publication": "IMF News, May 23, 2023", "sourceUrl": "https://www.imf.org/en/news/articles/2023/05/22/mcs052323-united-kingdom-staff-concluding-statement-2023-article-iv-mission", "canonical": "https://www.imf.org/en/news/articles/2023/05/22/mcs052323-united-kingdom-staff-concluding-statement-2023-article-iv-mission", "overlayPath": "/en/news/articles/2023/05/22/mcs052323-united-kingdom-staff-concluding-statement-2023-article-iv-mission/index.md", "summary": "Buoyed by resilient demand in the context of declining energy prices, the UK economy is expected to avoid a recession and maintain positive growth in 2023.", "publishDate": "2023-05-23", "sections": [ { "heading": "Mission Concluding Statement — key messages", "content": "- Buoyed by resilient demand in the context of declining energy prices, the UK economy is expected to avoid a recession and maintain positive growth in 2023.\n- Economic activity has slowed significantly from last year and inflation remains stubbornly high following the severe terms-of-trade shock due to Russia’s war in Ukraine and, to some extent, labor supply scarring from the pandemic.\n- Monetary policy will need to remain tight to keep inflation expectations well-anchored and bring inflation to target.\n- Fiscal policy should continue to be aligned with monetary policy in the fight against inflation, while protecting key public services and the vulnerable.\n- The UK financial system has weathered the recent global banking stress well; continued strong oversight, including of smaller banks and the diverse non-bank financial sector, will be critical to preserve UK financial stability.\n- Realizing the UK’s full growth potential will require wide-ranging, further evidence-based reforms, including addressing the post-pandemic rise in labor inactivity (mainly due to long-term illness); removing impediments to business investment (especially policy and regulatory uncertainty); and enhancing public investment and transformational spending to boost productivity and accelerate the green transition." }, { "heading": "Economic outlook and risks", "content": "- Staff forecasts growth to slow to 0.4 percent in 2023, held back by tighter monetary and fiscal policies needed to curb inflation, and lingering impacts of the terms-of-trade shock.\n- This forecast represents a 0.7 percentage point upgrade to the IMF’s April World Economic Outlook forecast of -0.3 percent and reflects higher-than-expected resilience in both demand and supply.\n- Growth projections:\n - 1 percent in 2024.\n - Average around 2 percent in 2025 and 2026.\n - Settle at 1½ percent thereafter (staff’s estimate of trend growth).\n- Inflation trajectory:\n - Declining energy prices and widening economic slack are expected to substantially reduce inflation to around 5 percent y/y by end-2023.\n - Below the 2 percent target by mid-2025.\n- Major risks:\n - Upside: greater-than-anticipated persistence in price- and wage-setting leading to higher inflation for longer, intensifying the need for tighter demand-management policies and/or a drift-up in inflation expectations with potential re-pricing of long-term financial assets and macro-financial spillovers.\n - Downside: further tightening in global financial conditions that restrains credit and trading partner demand, amplified if contagion to the UK financial sector occurs and/or adverse macro-financial feedback loops (such as a housing market correction) are triggered." }, { "heading": "Macroeconomic management priorities — monetary and fiscal policy", "content": "- Monetary policy actions and assessment:\n - The Bank of England (BoE) was the first major central bank to lift its policy rate (in December 2021) and has since hiked Bank Rate by 440 basis points.\n - The BoE commenced quantitative tightening (QT) in March last year with passive run-off and accelerated in November with active gilt sales.\n - Given transmission lags, sizable rate hikes implemented since August are expected to have their peak impact from the second half of 2023.\n - Inflation momentum, measured with annualized 3-month core inflation rates, remains strong, at about 5 percent in March.\n - Inflation is projected to return to the 2 percent target only by mid-2025, 6-months later than in staff’s April forecast, with risks tilted to the upside.\n - Policy recommendation: some further monetary tightening will likely be needed, and rates may have to remain high for longer; continuous review of pace and magnitude is warranted. The BoE should focus on underlying measures of inflation—such as wage growth and services inflation—and see-through base effects in energy prices.\n - QT strategy recommendation: continue as envisaged to reduce BoE’s footprint in markets and establish headroom for future asset purchases; incremental approach while relying on Bank Rate as the key instrument is advantageous.\n- Fiscal policy actions and assessment:\n - The last two budgets have aligned fiscal policy with monetary policy and should stabilize debt.\n - Staff’s forecast implies a 3 percent of GDP headline deficit reduction between FY2022/23 and FY2027/28, with public sector net debt (excluding the BoE) stabilizing at 97 percent of GDP at the end of the forecast period.\n - With a close-to-neutral fiscal stance in 2023 and contraction thereafter, fiscal policy is supporting disinflation.\n - Near-term recommendation: save any revenue overperformance to avoid complicating monetary policy and rebuild fiscal buffers; ensure the Energy Price Guarantee scheme expires as planned and target any future support; invest in data and IT systems to reach vulnerable households outside the welfare system.\n - Medium-term recommendation: the fiscal strategy should account better for spending pressures to preserve service delivery and investment needs. The Spring Budget’s assumed expenditure envelopes after FY2024/25 could imply large reductions for some departmental budgets under realistic allocations.\n - Policy options to achieve consolidation while protecting services and growth-enhancing investment:\n - Replace the triple lock on pensions with the best practice of inflation-indexation.\n - Strengthen carbon taxation to deliver Net Zero targets.\n - Reform property taxes, including updating real estate valuations and rebalancing away from transaction taxes.\n - Improve efficiency and fairness by eliminating loopholes in wealth and income taxation, and national insurance contributions." }, { "heading": "Financial sector stability and macroprudential framework", "content": "- Credit and balance sheet conditions:\n - The current credit downturn is showing signs of bottoming out.\n - Household and corporate balance sheets have thus far shown resilience, but corporate insolvencies have risen and pressures have intensified in the mortgage and commercial real estate markets.\n- Macroprudential recommendations:\n - Support for keeping the countercyclical capital buffer (CCyB) at 2 percent for now, with continued close monitoring to calibrate the buffer going forward.\n - Strengthen the BoE’s top-down stress testing capacity, as recommended by the 2022 Financial Sector Assessment Program (FSAP).\n- Bank resilience and supervisory recommendations:\n - Major UK banks maintain capital and liquidity buffers well above prudential requirements.\n - Prudential Regulation Authority’s (PRA) intensified liquidity monitoring is welcome; staff encourages expanded data collection and analysis on depositor behavior to inform policy deliberations on the liquidity coverage ratio (LCR) and domestic stress testing.\n - PRA’s Strong and Simple Framework for non-systemic domestic banks and building societies should be carefully weighed before amending supervisory requirements for smaller banks.\n- Lessons from the pension funds’ LDI crisis:\n - The BoE’s intervention successfully restored market functioning via timely intelligence, coordination, reserve pricing for gilt purchases, and clear communication on temporary/targeted nature.\n - Authorities’ actions to strengthen LDI resilience are welcomed; staff supports FPC recommendation that The Pension Regulator’s remit take into account financial stability considerations.\n- Non-bank financial institutions (NBFI) vulnerabilities — recommended actions:\n - Strengthen NBFI liquidity via enhanced liquidity management, operational readiness for margin calls, and more stringent liquidity regulation for NBFIs holding leveraged exposures in core markets.\n - Improve understanding of NBFI risks through the authorities’ “system-wide exploratory scenario”.\n - Close data gaps via enhanced cooperation among national regulators and coordination with the FSB and other jurisdictions.\n - Consider allowing BoE liquidity backstops to systemically important and adequately supervised NBFIs." }, { "heading": "Reforms to enhance policy frameworks and resolution regimes", "content": "- Fiscal framework reforms:\n - All major discretionary fiscal policy changes should be accompanied with a full set of macroeconomic and fiscal forecasts by the Office for Budget Responsibility (OBR), unless the OBR assesses such a forecast is not necessary.\n - Consider a mechanism for the OBR to provide parliament with an analysis of the impact of proposed changes in the fiscal rules before votes.\n - Better defined escape clauses with clear conditions would help avoid loss of credibility associated with frequent rule changes.\n - Consider a framework anchored in the probability of debt stabilization to provide greater flexibility while remaining stable.\n- Resolution and depositor protection reforms:\n - Recent bank resolutions show the BoE effectively used its 2009 Banking Act powers (example: sale of Silicon Valley Bank (SVB) UK to HSBC UK Bank plc fully protected all SVB UK depositors without cost to the taxpayer).\n - Challenges identified: high speed of deposit withdrawals, risk of disruptions to businesses with uninsured deposits, and lack of loss-absorbing capacity held by smaller banks.\n - Authorities are considering options to improve depositor payouts in bank failures; reforms should be supported by careful depositor data analysis and consideration of moral hazard.\n - Recommendation from 2022 FSAP: Financial Services Compensation Scheme should build up a prefunded deposit insurance fund with an appropriate target level.\n- Regulatory reform principles:\n - Preserve the primacy of financial stability, safety and soundness, and market integrity objectives.\n - Safeguard the FPC’s financial stability objective and strengthen its focus on global financial standards and cross-border surveillance.\n - Allow adequate time for consultation on proposed reforms to balance stability and innovation; competition and innovation mandates should be subordinate to financial stability.\n - Any adjustment to ring-fencing or the SMCR should be carefully weighed and maintain robustness." }, { "heading": "Structural policies to uplift growth and accelerate the green transition", "content": "- Recent measures and context:\n - The Spring Budget introduced supply-side measures, notably increased childcare support and a capital investment allowance.\n - Decline in uncertainty due to the “Windsor Framework” agreement and a measured approach to retained EU laws should favorably impact business investment.\n - Chancellor’s 4Es’ vision (enterprise, education, employment, everywhere) targets growth areas such as advanced manufacturing, life sciences, and clean energy.\n- Recommended evidence-based reforms to add momentum:\n - Further enhance policy certainty via wider permanent capital investment incentives and predictable tax and regulatory regimes.\n - Boost small and medium-sized firms’ access to finance and R&D support (including, for example, via a return to Horizon Europe).\n - Ease planning restrictions and accelerate catalytic public investments for the green transition and delivery of critical network and healthcare infrastructures.\n - Raise labor force participation and productivity by strengthening skills and education outcomes, and improving healthcare services.\n - Fine-tune the immigration system to alleviate sectoral and skilled labor shortages and enhance labor market flexibility.\n- Accelerating the green transition:\n - The UK has ambitious Net Zero targets underpinned by a strong legal framework but there is scope for additional quantifiable measures.\n - Suggested actions:\n - More rapidly extend the UK’s ETS and legally clarify the phase-in of carbon pricing regulations.\n - Provide more incentives for the green transition (e.g., expanding the grant program for low-income households’ heat pump installations and home insulation).\n - Remove bottlenecks by setting out longer-term plans to attract private investment.\n - Benefits: lower energy input costs and increased energy security from transition to a greener energy mix.\n\nSource: United Kingdom: Staff Concluding Statement of the 2023 Article IV Mission (May 23, 2023).\n\n---\n\n\n References\n\n- United Kingdom and the IMF\n- IMF Policy Advice -- A Factsheet\n- Mission Concluding Statements\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2023/05/22/mcs052323-united-kingdom-staff-concluding-statement-2023-article-iv-mission" } ], "bullets": [ "[Markdown version](/en/news/articles/2023/05/22/mcs052323-united-kingdom-staff-concluding-statement-2023-article-iv-mission/index.md)", "[Structured JSON version](/en/news/articles/2023/05/22/mcs052323-united-kingdom-staff-concluding-statement-2023-article-iv-mission/index.json)", "[Bundle manifest](/en/news/articles/2023/05/22/mcs052323-united-kingdom-staff-concluding-statement-2023-article-iv-mission/bundle-manifest.json)", "Published: May 23, 2023", "Buoyed by resilient demand in the context of declining energy prices, the UK economy is expected to avoid a recession and maintain positive growth in 2023.", "Economic activity has slowed significantly from last year and inflation remains stubbornly high following the severe terms-of-trade shock due to Russia’s war in Ukraine and, to some extent, labor supply scarring from the pandemic.", "Monetary policy will need to remain tight to keep inflation expectations well-anchored and bring inflation to target.", "Fiscal policy should continue to be aligned with monetary policy in the fight against inflation, while protecting key public services and the vulnerable.", "The UK financial system has weathered the recent global banking stress well; continued strong oversight, including of smaller banks and the diverse non-bank financial sector, will be critical to preserve UK financial stability.", "Realizing the UK’s full growth potential will require wide-ranging, further evidence-based reforms, including addressing the post-pandemic rise in labor inactivity (mainly due to long-term illness); removing impediments to business investment (especially policy and regulatory uncertainty); and enhancing public investment and transformational spending to boost productivity and accelerate the green transition.", "Staff forecasts growth to slow to 0.4 percent in 2023, held back by tighter monetary and fiscal policies needed to curb inflation, and lingering impacts of the terms-of-trade shock.", "This forecast represents a 0.7 percentage point upgrade to the IMF’s April World Economic Outlook forecast of -0.3 percent and reflects higher-than-expected resilience in both demand and supply.", "Growth projections:", "Inflation trajectory:", "Major risks:", "Monetary policy actions and assessment:", "Fiscal policy actions and assessment:", "Credit and balance sheet conditions:", "Macroprudential recommendations:", "Bank resilience and supervisory recommendations:", "Lessons from the pension funds’ LDI crisis:", "Non-bank financial institutions (NBFI) vulnerabilities — recommended actions:", "Fiscal framework reforms:", "Resolution and depositor protection reforms:", "Regulatory reform principles:", "Recent measures and context:", "Recommended evidence-based reforms to add momentum:", "Accelerating the green transition:", "[United Kingdom and the IMF](http://www.imf.org/external/country/GBR/index.htm)", "[IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)", "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)", "[PRESS CENTER](http://presscenter.imf.org/)", "[https://www.imf.org/en/home](https://www.imf.org/en/home)" ], "alternates": { "markdown": "/en/news/articles/2023/05/22/mcs052323-united-kingdom-staff-concluding-statement-2023-article-iv-mission/index.md", "json": "/en/news/articles/2023/05/22/mcs052323-united-kingdom-staff-concluding-statement-2023-article-iv-mission/index.json", "bundleManifest": "/en/news/articles/2023/05/22/mcs052323-united-kingdom-staff-concluding-statement-2023-article-iv-mission/bundle-manifest.json" }, "generatedAtUtc": "2026-09-26T02:04:54.509Z" }