Managing Director’s Remarks Opening at the UK’s 2021 Article IV and Financial Sector Assessment Program
IMF News, December 14, 2021
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- Published: December 14, 2021
Overview
- Remarks delivered by Kristalina Georgieva on December 14, 2021, opening the UK’s 2021 Article IV and Financial Sector Assessment Program (FSAP).
- FSAP for the UK was last done in 2016.
- Key contextual points:
- The UK experienced a difficult year with the pandemic and post-Brexit adjustments but proved more resilient than expected.
- Resilience attributed to a rapid vaccination campaign and strong coordinated policy support.
- Output and employment have returned close to pre-pandemic levels despite ongoing headwinds.
- Financial stability has been preserved; UK’s strong policy frameworks were critical to enabling the policy response.
- Covid-19 continues to strain supply chains, contribute to rising prices, and tighten labor markets; a new variant (Omicron) raises uncertainty and complicates policymaking.
Near-term macroeconomic outlook and key figures
- Growth projections and inflation:
- "about 6.8 percent in 2021 and 5 percent in 2022" consistent with the October WEO projections.
- Inflation pressures will linger into 2022, estimated to peak at "about 5½ percent."
- Omicron will have some near-term impact and brings considerable uncertainty.
- Policy guidance (summarized advice):
- Monetary policy:
- "Monetary policy needs to withdraw the exceptional support provided during 2020."
- Pace of withdrawal should weigh risks to inflation and growth.
- Fiscal policy:
- "Fiscal policy should retain an important role in responding to large shocks."
- There is now a playbook for using fiscal support in the event of new widespread mandated closures for health reasons.
- Fiscal policy "could also have a role in responding to present supply-demand imbalances."
- Macroprudential policy:
- "Macroprudential polices will need to maintain strong vigilance in a period where real interest rates are low and risk taking high."
Managing policies in a context of higher volatility
- Macroeconomic landscape likely to be more volatile going forward.
- Fiscal policy role:
- "Fiscal policy has a key role to play in addressing volatility through automatic stabilizers."
- Automatic stabilizers are already high in the UK.
- Pandemic support policies in the skills-building and small business areas "should be evaluated as options for more of a more permanent status."
Anchoring policies and preserving space through strong frameworks (FSAP findings)
- Financial soundness:
- FSAP found that "the financial soundness of UK banks and insurers has increased since the global financial crisis."
- "The system is better placed today that at the time of the 2016 FSAP to face near-term macrofinancial challenges."
- Structural transitions and FSAP deep dives:
- The UK financial system is undergoing several important structural transitions.
- FSAP examined climate-related financial risks and disclosures.
- Suggested policy enhancements from the FSAP:
- Continued expansion of "the scope and perimeter of systemic risk monitoring and analysis."
- Address "the data gaps for effective oversight of cross border nonbank (NBFI) risks."
Building Back Better — growth strategy and Net Zero
- Authorities have proposed and funded a comprehensive growth strategy.
- IMF welcomes growth pillars covering:
- infrastructure,
- skills,
- innovation;
- and strategies such as "Leveling Up and Net Zero."
- Recommendations:
- "Options to scale up efforts further should be pursued, supported by raising additional revenues."
- The "Net Zero Strategy is a major achievement" and authorities are encouraged to "deliver at the ambitious end of the spectrum."
Conclusion and highlights
- Despite the renewed surge in Covid-19 cases, the UK has advanced in many respects versus this time last year:
- Successful vaccination campaign—now focused on booster shots.
- The Trade and Cooperation agreement reached with the EU.
- A much stronger economy and labor market than expected.
- Final assessment: with continued collaboration and strong solidarity, the United Kingdom can "build forward better, creating an economy that is more resilient, sustainable, and inclusive."
Managing Director’s Remarks Opening at the UK’s 2021 Article IV and Financial Sector Assessment Program, December 14, 2021