IMF Executive Board Concludes 2018 Article IV Consultation with the United Kingdom

November 14, 2018

On November 12, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the United Kingdom.

Output continues to grow at a moderate pace. Since the referendum on EU membership, business investment has been depressed by uncertainty about the future relationship between the UK and EU and expectations of higher future trade costs. At the same time consumption has been constrained by slow real income growth. Weaker domestic demand has been partially offset by stronger net exports, underpinned by strong external demand and weaker sterling. Potential growth has also slowed due to slow capital accumulation, decline in net migration from the European Union (EU), and persistent low productivity. Slack in the economy is limited and unemployment has declined to historically low levels.

Monetary policy has tightened, with a cumulative 50 basis point increase in Bank Rate over the last year. Nevertheless, financial conditions remain relatively easy, with mortgage rates at record low levels and total credit growing in line with GDP. Sustained fiscal consolidation has brought the public deficit below two percent of GDP for the first time in 15 years. A comprehensive strategy is underway to boost productivity based on supporting investment in physical and human capital. The authorities are focused on Brexit preparation work, which entails significant administrative and legislative changes.

Growth is projected to remain around 1½ percent going forward, under a baseline scenario that assumes a smooth transition to a broad free trade agreement with the EU. The most significant risk to the forecast is the possibility of leaving the EU without an agreement, which would have a large negative impact on growth, especially if it happens in a disorderly manner and without a transition period. Beyond Brexit, the UK faces a range of other economic challenges, including persistently lackluster productivity growth, high public debt, rising age-related spending pressures, and a wide current account deficit.

Executive Board Assessment [2]

Executive Directors noted that moderate growth continues, and the labor market is strong, although domestic demand remains constrained by uncertainty about the future economic relationship with the EU. Directors agreed that the possibility of a “no deal” Brexit is the most significant risk to the outlook.

Directors emphasized the importance of a timely agreement with the EU, accompanied by an implementation period to avoid a cliff edge exit in March 2019 and to allow firms and workers time to adjust to the new relationship. An agreement that minimizes barriers to trade in goods and services would best support economic activity and limit disruptions and global spillovers. Nevertheless, preparations should continue for all possible scenarios.

Directors commended the steady progress in reducing fiscal deficits over the last decade and emphasized that continued fiscal consolidation is critical to build buffers against future shocks, in a context of relatively high public debt, a closed output gap, and significant medium‑term spending pressures related to population aging. They noted that revenue reforms are likely to be needed to create fiscal space and improve efficiency. Directors considered that as the impact of past sterling depreciation on prices continues to fade, the pace of further monetary policy tightening should be gradual and data‑dependent in an environment of greater‑than‑usual uncertainty. They concurred that the policy rate should continue to be used as the main monetary policy instrument. Once the Bank of England begins unwinding its balance sheet, this process should proceed in a gradual and predictable manner.

Directors noted that in the case of a disorderly Brexit, policies should seek to safeguard macroeconomic and financial stability. They noted that judicious use of the flexibility embedded in the fiscal framework may be appropriate to support the economy in such a scenario, stressing that any easing of fiscal policy should be temporary, limited, and anchored by credible medium‑term consolidation plans. Directors welcomed the authorities’ readiness to take actions to minimize any market disruptions, including by ensuring the financial system has adequate liquidity.

Directors encouraged the authorities to maintain robust prudential and supervisory standards after Brexit. They welcomed the authorities’ efforts to proactively help financial institutions prepare for EU exit, and their commitment to creating temporary permission and recognition regimes that would guarantee EU financial institutions the ability to continue to operate in the United Kingdom for a limited period after departure. Directors called on all parties involved to work together to mitigate transition and spillover risks related to changes in regulatory regimes and responsibilities. They also underscored the importance of continued close cross‑border cooperation in the future to maintain financial system stability.

Directors agreed that sustained policy efforts would be needed to enhance productivity, inclusiveness, and external competitiveness. They welcomed recent initiatives to support infrastructure investment and human capital. They noted that greater use of active labor market policies, including support for re‑training, could facilitate labor reallocation across regions and sectors after Brexit. Directors welcomed ongoing efforts to enhance corporate transparency and looked forward to sustained progress in strengthening the effectiveness of enforcement of measures against foreign bribery.


United Kingdom: Selected Economic Indicators, 2014–19

2014

2015

2016

2017

2018

2019

Projections

Real Economy (change in percent)

Real GDP 1/

2.9

2.3

1.8

1.7

1.4

1.5

Private final domestic demand

2.9

2.8

3.0

2.1

1.1

1.4

CPI, end-period

1.0

0.1

1.2

3.0

2.3

2.1

Unemployment rate (in percent) 2/

6.2

5.4

4.9

4.4

4.1

4.2

Gross national saving (percent of GDP)

12.3

12.3

12.0

13.6

13.7

14.0

Gross domestic investment (percent of GDP)

17.3

17.2

17.3

17.4

17.2

17.2

Public Finance (fiscal year, percent of GDP) 3/

Public sector overall balance

-4.9

-3.8

-2.3

-1.9

-1.9

-1.5

Public sector cyclically adjusted primary balance (staff estimates) 4/

-2.7

-2.0

-0.6

-0.1

-0.3

0.0

Public sector net debt

82.6

82.3

85.2

85.3

85.5

84.7

Money and Credit (end-period, 12-month percent change)

M4

-1.1

0.2

6.2

3.8

…

…

Net lending to private sector

1.5

2.8

3.8

3.8

…

…

Interest rates (percent; year average)

Three-month interbank rate

0.5

0.6

0.5

0.4

…

…

Ten-year government bond yield

2.6

1.9

1.3

1.2

…

…

Balance of Payments (percent of GDP)

Current account balance

-4.9

-4.9

-5.2

-3.8

-3.5

-3.2

Trade balance

-1.6

-1.4

-1.6

-1.2

-1.0

-0.9

Net exports of oil

-0.6

-0.4

-0.4

-0.4

-0.5

-0.4

Exports of goods and services (volume change in percent)

2.3

4.4

1.0

5.4

0.0

1.2

Imports of goods and services (volume change in percent)

3.8

5.5

3.3

3.2

-0.3

0.6

Terms of trade (percent change)

1.3

1.5

1.9

-0.5

0.2

0.0

FDI net

-5.8

-3.7

-8.2

3.1

2.3

1.9

Reserves (end of period, billions of US dollars)

109.1

130.5

136.6

158.6

…

…

Fund Position (as of May 31, 2016)

Holdings of currency (in percent of quota)

82.5

82.5

Holdings of SDRs (in percent of allocation)

70.2

70.2

Quota (in millions of SDRs)

20,155

20,155

Exchange Rates

Exchange rate regime

Floating

Bilateral rate (October 5, 2018)

US$1 = £0.7832

Nominal effective rate (2010=100, year average) 5/

107.2

114.2

101.8

95.9

95.5

…

Real effective rate (2010=100, year average) 5/

109.7

116.8

104.3

99.1

99.0

…

Sources: Bank of England; IMF's Information Notice System; HM Treasury; Office for National Statistics; and IMF staff estimates.

1/ Based on ONS preliminary estimate of GDP for 2017Q4.

2/ ILO unemployment; based on Labor Force Survey data.

3/ The fiscal year begins in April. Data exclude the temporary effects of financial sector interventions. Debt stock data refers to the end of the fiscal year using centered-GDP as a denominator. English housing associations are re-classified from the public to the private sector starting in FY2017.

4/ In percent of potential output.

5/ As of September 2018.


[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .

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