## IMF Executive Board Concludes 2024 Article IV Consultation with the United Kingdom

_IMF News, July 8, 2024_

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## Bibliographic details
- Published: July 8, 2024

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### Outlook: growth and inflation
- "The economy is approaching a soft landing, with growth recovering faster than expected after a mild technical recession in 2023."
- Growth projections:
  - Real GDP growth (%): 0.1 (2023, Est.); 0.7 (2024, Projections); 1.5 (2025, Projections); 1.7 (2026, Projections)
- Inflation dynamics:
  - Inflation, annual average (%): 7.3 (2023); 2.7 (2024); 2.1 (2025); 2.0 (2026)
  - Inflation is forecast to temporarily rise from "around 2 percent presently to 2.5 percent by end-2024, due to regulated energy price base effects, before returning durably to 2 percent in early 2025."
- Drivers:
  - Disinflation buoys real incomes, monetary policy easing, and more accommodative financial conditions underpin the projected acceleration to 1.5 percent in 2025.
  - Rapid fall in inflation from last year’s double-digit levels attributed to reversal of the energy price shock and demand impact of tight monetary policy.

### Risks and scenarios
- Risks to growth and inflation are "balanced."
- Short-term scenarios:
  - Downside: growth could be lower if the anticipated pick-up in consumption from current weak levels does not materialize.
  - Upside: growth could be higher if there are stronger-than-expected second round effects from falling energy prices (this also represents a downside risk to inflation).
  - Alternative risk: stronger wage pressures could lend greater persistence to services inflation, with possible repercussions for growth as monetary policy adjusts.
- Medium-term risk:
  - Key downside risk is that productivity and labor supply disappoint relative to expectations.
  - Upside potential from "bold implementation of ambitious structural reforms and AI adoption."

### Executive Board assessment — monetary policy
- Directors recognized the economy is approaching a soft landing and welcomed the rapid decline in inflation since last summer.
- Monetary stance and guidance:
  - Directors agreed that with the monetary policy stance reaching a turning point, the risks of premature versus delayed easing should be appropriately balanced.
  - They welcomed the Monetary Policy Committee’s meeting‑by‑meeting approach to adjusting rates as appropriate given prevailing uncertainty.
  - Noted that "a press conference after each rate decision could be beneficial" for communication, particularly amid divergence from US interest rate paths.
  - Emphasized importance of articulating a clear rationale for future Quantitative Tightening (QT) plans as the BoE’s balance sheet approaches its steady‑state size.
  - A few Directors supported the high‑level principles proposed by staff for BoE capital policies in future rounds of Quantitative Easing/QT.
  - Directors welcomed the BoE’s commitment to act on the recommendations of the Bernanke Review.

### Executive Board assessment — fiscal policy
- Directors agreed the main medium‑term challenge is to better account for public spending needs while stabilizing public debt.
- Fiscal stance and recommendations:
  - Fiscal policy has remained tight, continuing to target medium-term debt stabilization, although the last two budgets included tax cuts aimed at boosting investment and labor supply.
  - Directors observed that absent a substantial boost to potential growth, stabilizing public debt will require difficult tax and spending choices.
  - Possible revenue-raising measures noted: stronger carbon taxation and road‑usage taxation, broadening the base of VAT and inheritance tax, reforming capital gains and property taxation.
  - On spending, Directors saw scope for savings from reforms to the state pension and noted that any expansion or increase in user charging for public services should effectively protect the vulnerable.
  - They encouraged the authorities to strengthen the United Kingdom’s fiscal framework.

### Executive Board assessment — structural policies and climate
- Directors emphasized need for more ambitious structural reforms to boost potential growth.
- Recommendations and priorities:
  - Support for adoption of a stable, long‑term growth strategy, backed by an independent growth commission.
  - Particular focus on easing planning restrictions, upskilling the workforce, and improving health outcomes to boost weak productivity growth.
  - Encouraged continued cautious approach to industrial policy and constructive participation in the WTO.
  - Welcomed progress in reducing carbon emissions and urged staying the course on climate policy.
  - Recommended adequate public investment to support the green transition, stronger feebates to hasten transition to heat pumps and electric vehicles, and strengthening of emissions trading to support the carbon price.

### Executive Board assessment — financial sector and supervision
- Directors noted continued resilience of the financial sector and that financial stability risks appear well contained at this time, but careful monitoring is warranted.
- Supervisory priorities and initiatives:
  - Ongoing strong supervision of banks and NBFIs encouraged.
  - Welcomed BoE initiatives to mitigate NBFI risks, including the system‑wide exploratory scenario exercise and the design of a backstop lending tool.
  - Encouraged continued progress in closing data gaps.
  - Welcomed preservation of primacy of financial stability objectives in the Edinburgh reforms but urged continued vigilance.
  - Enhancing the effectiveness of the AML/CFT supervisory regime remains important.

### Structural headwinds and labor market
- Longer-term growth prospects subdued due to:
  - Weak labor productivity growth.
  - Population aging.
  - "Somewhat higher than expected inactivity levels due to long term illness, only partly offset by higher migration numbers."
  - Elevated pressures on public services, notably in health, amidst ongoing industrial action over pay.
- Policy measures to boost productivity have been implemented but "will not be sufficient to lift productivity to close to pre-GFC levels."
- Post‑Brexit context:
  - Post‑Brexit uncertainty has continued to ease in context of progress on Irish border arrangements, review of retained EU laws, and resilience in UK services exports.
  - UK firms trading with the EU are still adapting to the post‑Brexit arrangement.

### United Kingdom: Selected Economic Indicators
- Population (million): 68.1
- Per capita GDP (US$): 49,049
- Key export markets: Euro area (36%); US(21%)
- Output
  - Real GDP growth (%): 0.1 (2023, Est.); 0.7 (2024, Projections); 1.5 (2025, Projections); 1.7 (2026, Projections)
- Unemployment
  - Unemployment (%): 4.0 (2023, Est.); 4.2 (2024, Projections); 4.1 (2025, Projections)
- Prices
  - Inflation, annual average (%): 7.3 (2023); 2.7 (2024); 2.1 (2025); 2.0 (2026)
  - Inflation, end-of-period (%): 2.5 (2024)
- Public sector finances (fiscal year)
  - Revenue (% GDP): 40.6 (2023); 40.3 (2024); 40.5 (2025)
  - Expenditure (% GDP): 44.8 (2023); 43.7 (2024); 43.5 (2025); 43.4 (2026)
  - Public sector overall balance (% GDP): -4.2 (2023); -3.4 (2024); -3.2 (2025); -2.9 (2026)
  - Public sector cyclically adjusted primary balance (staff estimates): -1.0 (2023); -0.7 (2024); -0.1 (2025)
  - Public sector net debt (excl. BoE) 2/: 89.2 (2023); 91.6 (2024); 93.1 (2025); 94.5 (2026)
- Money and Credit
  - Broad money (% change): -0.9 (2023)
  - Credit to the private sector (% change): 0.2 (2023)
  - 3-month interbank rate (%): 5.0 (2023)
- Balance of Payments
  - Current account balance (% GDP): -3.3 (2023); -3.5 (2024)
  - Reserves (end-of-period, billions of US dollars): 190.5 (2023)
  - Net international investment position (% GDP): -30.7 (2023)
- Exchange Rates
  - REER (% change) 1/: (data not shown in table)
- Notes:
  - Sources: Bank of England; HM Treasury; IFS; INS; ONS; and IMF staff estimates.
  - 1/ Based on relative consumer prices. An increase denotes an appreciation.
  - 2/ Public sector net debt is defined as public sector gross debt minus liquid assets held by general government and non-financial public corporations. It excludes Bank of England operations. The fiscal year begins in April.

*IMF Executive Board press release, July 8, 2024.*

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## References

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_Source: https://www.imf.org/en/news/articles/2024/07/03/pr-24259-uk-imf-concludes-2024-article-iv-consultation_