Speech

2017 UK Article IV Press Conference: Opening Remarks by IMF Managing Director Christine Lagarde

December 20, 2017

Introduction

Good morning. It is a pleasure for me to be here in London for the conclusion of the IMF’s annual Article IV consultation—our regular health check—with the UK. I would like to express to the UK authorities our appreciation for their active engagement in the process.

Much has happened in the UK since our last Article IV mission in May of last year. Of course, the most significant events were voters’ decision to withdraw from membership in the European Union, and the government’s decision to invoke Article 50. These are already having an impact in the economy, even though the UK is not expected to leave the EU until 2019. Let me start by summarizing how we see the economic outlook, and then turn to some of the key policy issues confronting the UK.

1. Economic Outlook

The global economy has been doing reasonably well. Our global forecast from last October is of 3.6% growth this year, and 3.7% next year. We will revise these numbers in our World Economic Outlook Update in January. In the United Kingdom, since the start of this year, growth has slowed notably. The significant depreciation of sterling that followed the referendum has pushed inflation over 3 percent, squeezing real incomes and private consumption. Companies are also delaying some investment decisions until they have greater clarity about post-Brexit trade rules.

We project GDP growth of 1.6 percent this year, down from 1.8 percent last year and 2.3 percent in 2015, despite a significantly stronger global environment. Growth is projected to remain around 1½ percent next year, as uncertainty about the shape of Brexit persists and inflation remains above target.

2. Fiscal Policies

Turning to fiscal policy, significant progress has been made in reducing the deficit since the global financial crisis. But the UK’s public debt remains high, at 87 percent of GDP. Continued deficit reduction is therefore critical to create further room to respond to future shocks.

Over the longer term, the UK will face significant fiscal pressures. Like many advanced economies, population aging is expected to lead to material increases in spending on health care, pensions and long-term care, while productivity growth has been slow. And a slowly growing economy means fewer resources will be available to meet this increased spending.

These challenges are likely to become even more acute if trade barriers further reduce productivity . Taken together, these developments mean the UK may in the future face difficult decisions about the size of the public sector and the mode of delivery and financing of public services.

3. Structural Reforms

Structural reforms have an important role to play in raising productivity. While UK goods and labor markets are very competitive, the UK underinvests in infrastructure and innovation and falls short in human capital development . Recent government initiatives toincrease public sector investment and reform technical education are steps in the right direction. But more needs to be done, such as easing planning restrictions and reforming property taxes to boost housing supply .

4. Monetary Policy

On monetary policy, we agree with the Bank of England that tightening should proceed at a gradual pace. This will return inflation to target as the impact of the depreciation of sterling fades. A faster rate of tightening may be called for, however, if low unemployment results in too rapid wage growth.

5. Financial Sector

UK banks have strengthened steadily since the financial crisis, and are in a far better position today with respect to capital, leverage and liquidity.

The UK financial sector and its supervisors will be confronted with major challenges going forward . While the primary responsibility for ensuring that banks and other financial institutions are ready for Brexit lies with those institutions themselves, the UK authorities have been proactive in engaging with them to ensure that they are well-prepared.

Given the complexity of the UK financial system and its high degree of global integration, continued close cross-border regulatory and supervisory cooperation between the UK, EU and other relevant authorities is also essential to manage risks.

6. Brexit Negotiations

Let me conclude with a word on Brexit negotiations. We welcome the recent progress that has been achieved in negotiations between the UK and the EU, which will allow the discussions to move on to issues related to the future trading relationship and a transition period.

The ultimate decision on what form that relationship should take is a matter for the UK and EU to decide. On our side, we would simply repeat the point we already made before: to underscore that an agreement thatminimizes the introduction of trade barriers and allows adequate time to implement changes would best support stability and growth.

The tasks associated with leaving the EU are numerous and complicated . They include not only negotiating a new trade deal with the EU, but also creating the domestic capacity to take over new responsibilities, negotiating new trade arrangements with about 60 countries to replace those that came with EU membership, and translating many thousands of pages of EU law into UK statutes.

We therefore encourage the UK and EU to reach agreement soon on transitional arrangements that would apply for a period after the UK’s departure. This will provide households and firms with greater confidence going forward and towards the March 2019 exit date.

More details on these challenges and the policies we recommend to address them are contained in the mission’s Concluding Statement, which you have just received.

Thank you. I now look forward to your questions.