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© 2010 International Monetary Fund
November 2010
IMF Country Report No. 10/338
United Kingdom: 2010 Article IV Consultation—Staff Report; Staff Supplement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the United Kingdom.
The following documents have been released and are included in this package:
The Staff Report for 2010 Article IV Consultation prepared by a staff team of the IMF, following discussions that ended on September 27, 2010, with the officials of the United Kingdom on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on October 21, 2010. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
A staff supplement of November 2, 2010 updating information on recent economic developments.
A Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its November 8, 2010, discussion of the staff report on issues related to the Article IV consultation.
A statement by the Executive Director for the United Kingdom.
The documents listed below have been or will be separately released.
Selected Issues Paper
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
Copies of this report are available to the public from
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International Monetary Fund
Washington, D.C.
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INTERNATIONAL MONETARY FUND
UNITED KINGDOM
Staff Report for 2010 Article IV Consultation
Prepared by Staff Representatives for the 2010 Consultation with the United Kingdom
Approved by Ajai Chopra and Tamim Bayoumi
October 21, 2010
Overview: The UK economy is on the mend. Economic recovery is underway, unemployment has stabilized, and financial sector health has improved. The challenge now is to support a balanced and sustainable recovery. The government’s forceful multi-year fiscal deficit reduction plan will promote such rebalancing and is essential to ensure debt sustainability, thereby greatly reducing the risk of a costly loss of confidence in public finances. Fiscal tightening will dampen but not stop growth as other sectors of the economy emerge as drivers of recovery, supported by continued monetary stimulus. Upside and downside risks around this central scenario of rebalancing with moderate growth and gradually falling inflation are symmetric. Monetary policy will need to be nimble if risks materialize, and fiscal automatic stabilizers should operate freely. Meanwhile, the UK authorities should continue to provide leadership and build support for ambitious global reform of financial regulation. Ensuring a smooth transition to a new supervisory architecture at home will also be important to secure a safer post-crisis environment.
The 2010 Article IV discussions were held in London during September 15–27, 2010. The team comprised Mr. Chopra (head), Messrs. Fletcher, Meier, and Takizawa, Ms. Barkbu (all EUR), Ms. Le Leslé (MCM), and Mr. Moore (MCM). Ms. Ruiz Arranz (EUR) contributed to the mission’s work from headquarters.
The mission met with Chancellor Osborne, Bank of England Governor King, Financial Services Authority Chairman Turner, and other senior officials, academics, think tanks, and private sector representatives. Mr. Gibbs (Executive Director) and Ms. Fisher (Advisor, OED) joined selected meetings.
The mission’s concluding statement was published on September 27, 2010 and can be found at: http://www.imf.org/external/np/ms/2010/092710.htm
Past surveillance: During the 2009 Article IV Consultation, Directors commended the authorities’ response to the financial crisis, but highlighted the significant vulnerabilities related to sharply rising public debt and continued financial sector fragility. The authorities’ June 2010 budget lays out a concrete multi-year plan to reverse the deterioration of the public finances and put debt on a firmly downward path, as recommended by Directors. Supporting this process, the creation of the Office for Budget Responsibility (OBR) also matches past IMF advice calling for independent provision of budget assumptions. The health of the financial system has improved over the last year, though further progress is necessary in this area.
Contents
I. The Economic Agenda
II. Progress in Rebalancing and Deleveraging
A. Sectoral Adjustments and Evolution of Financial Balances
B. Deleveraging and Macro-Financial Links
III. Prospects, Risks, and Spillovers
IV. Ensuring Fiscal Sustainability
V. Maintaining Monetary Stimulus
VI. Strengthening the Financial System
A. Financial Sector Soundness and Public Support
B. Regulatory Reform
C. Moving to a New Regulatory Architecture
VII. Staff Appraisal
Figures
1. Real Sector Developments
2. Behavior of Key Macro Variables Around Recession Times
3. Financial Position of Households
4. Labor Market Developments
5. Residential Housing Markets
6. Fiscal Developments
7. External Sector Developments
8. Banking Sector Indicators
9. Credit Market Developments
10. External Claims of Consolidated UK-Owned MFIs
11. Indicators of Capacity Utilization
12. Price Developments
Tables
1. Selected Economic and Social Indicators, 2005–11
2. Public Sector Operations, 2008/09–15/15
3. Balance of Payments, 2003–15
4. Net Investment Position, 2003–09
5. Medium-Term Scenario, 2004–15
Boxes
1. Inward Spillovers to the UK
2. To Tighten, or Not to Tighten—UK Fiscal Policy in the Public Debate
3. Effectiveness of the Bank of England’s Quantitative Easing
4. Accounting for Recent UK Inflation Dynamics
Annexes
A. Public Sector Debt Sustainability
B. Background Work
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INTERNATIONAL MONETARY FUND
UNITED KINGDOM
Staff Report for the 2010 Article IV Consultation—Informational Annex
Prepared by Staff Representatives for the 2010 Consultation with the United Kingdom
(In consultation with other departments)
October 21, 2010
Contents
I. Fund Relations
II. Statistical Issues
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INTERNATIONAL MONETARY FUND
UNITED KINGDOM
Prepared by the European Department
Staff Report for the 2010 Article IV Consultation—Supplementary Information
(In consultation with other departments)
Approved by Ajai Chopra and Tamim Bayoumi
November 2, 2010
This supplement provides an update on key economic and policy developments that occurred after the staff report was finalized. These developments do not affect the thrust of the staff appraisal. Indeed, several of the announced policies in the recently released Spending Review go in the direction recommended by staff (see paragraphs 25 and 47 in the staff report).
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Public Information Notice (PIN) No. 10/147
FOR IMMEDIATE RELEASE
November 9, 2010
International Monetary Fund
700 19th Street, NW
Washington, D. C. 20431 USA
On November 8, 2010 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the United Kingdom.1
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November 8, 2010
