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© 2011 International Monetary Fund
July 2011
IMF Country Report No. 11/220
United Kingdom: 2011 Article IV Consultation—Staff Report; Staff Supplement; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the United Kingdom
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2011 Article IV consultation with the United Kingdom, the following documents have been released and are included in this package:
The staff report for the 2011 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on June 6, 2011, 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 July 12, 2011. 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 July 25, 2011 and a staff statement of July 26, 2011 updating information on recent economic developments.
A Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its July 27, 2011 discussion of the staff report that concluded the Article IV consultation.
A statement by the Executive Director for the United Kingdom.
The document listed below has 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 the 2011 Article IV Consultation
Prepared by Staff Representatives for the 2011 Consultation with the United Kingdom
Approved by Ajai Chopra and Tamim Bayoumi
July 12, 2011
Context. Implementation of a wide-ranging policy program is underway, aiding the post-crisis repair of the economy. However, the recovery stalled over the last several months, inflation remains elevated, and unemployment is still unacceptably high. The financial system has stabilized and bank balance sheet repair continues, but this process is not complete and is vulnerable to setbacks.
Macroeconomic policy mix. The weakness in growth and rise in inflation raises the question whether it is time to adjust macroeconomic policies. The answer is no, as the deviations are largely temporary. Strong fiscal consolidation is underway and remains essential to achieve a more sustainable budgetary position, thus reducing fiscal risks. The inflation overshoot is driven largely by transitory factors, and hence maintaining the current scale of monetary stimulus is appropriate given fiscal adjustment and subdued wage growth. This macroeconomic policy mix will also assist in rebalancing the economy toward sustainable growth led by investment and external demand.
Risk scenarios. Nonetheless, there are significant risks to inflation, growth, and unemployment arising from uncertainties surrounding sovereign turmoil in parts of the euro area, headwinds from fiscal policy, volatile commodity prices, and the housing market. Policy flexibility will be essential to respond to shocks, with the appropriate response depending on the nature of the shock. For example, if there is mounting evidence that weak demand is likely to cause the economy to stall and enter a period of prolonged low growth and subdued inflation, a significant loosening of macroeconomic policies will be required.
Financial sector policy. Strong domestic measures and international coordination are needed to further bolster financial stability. Indeed, the stability and efficiency of the UK financial system is a “global public good” due to potential spillovers and thus requires the highest quality of supervision and regulation. In this context, continued build up of capital and liquidity buffers ahead of Basel III requirements is essential.
Mission details. The Article IV team comprised Mr. Chopra (head), Messrs. Fletcher, Kannan, and Takizawa, and Ms. Ruiz-Arranz (all EUR). Ms. Pazarbasioglu (MCM) joined the mission to discuss conclusions of the Financial Sector Stability Assessment. Mr. Marston and Ms. Mateos y Lago (both SPR) joined to discuss conclusions of the Spillover Report. The mission’s concluding statement was published on June 6, 2011 and can be found at http://www.imf.org/external/np/ms/2011/060611.htm.
Contents
I. Focus of the Consultation
II. The Macroeconomic Setting
A. Rebalancing Demand
B. Financial Sector Deleveraging
III. The Central Scenario and Risks
A. Growth and Employment
B. Inflation
C. Risks
IV. Macroeconomic Policies in the Central Scenario
A. The Policy Mix
B. The Monetary Policy Decision
C. Fiscal Consolidation Plans
V. Macroeconomic Policies in Risk Scenarios
VI. Financial Sector Policies
A. Achievements, Challenges, and Spillovers
B. Strengthening Financial System Soundness
C. Strengthening the Domestic Oversight Framework
D. Strengthening the Capacity to Deal with Systemically Important Financial Institutions (SIFIs)
E. The International Dimension
VII. Staff Appraisal
Figures
1. Real Sector Developments
2. Behavior of Key Macro Variables Around Recession Times
3. Financial Position of Households
4. Residential Housing Markets
5. External Sector Developments
6. Financial Ratios of Major UK Banks
7. Banking Sector Funding
8. Credit Market Developments
9. Indicators of Capacity Utilization
10. Labor Market Developments
11. Price Developments
12. External Claims of Consolidated UK-Owned MFIs
13. Fiscal Developments
Tables
1. Selected Economic and Social Indicators, 2007–12
2. Statement of Public Sector Operations, 2008/09–15/16
3. Statement of General Government Operations, 2004–10
4. General Government Stock Positions, 2004–10
5. Balance of Payments, 2004–16
6. Net Investment Position, 2004–10
7. Medium-Term Scenario, 2006–16
Boxes
1. What is Driving the Household Saving Rate in the UK?
2. What Does Okun’s Law Tell Us About the Output Gap?
3. FSSA: Main Recommendations
Annex
Public Sector Debt Sustainability
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INTERNATIONAL MONETARY FUND
UNITED KINGDOM
Prepared by Staff Representatives for the 2011 Consultation with the United Kingdom
(In consultation with other departments)
July 12, 2011
Contents
I. Fund Relations
II. Statistical Issues
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INTERNATIONAL MONETARY FUND
UNITED KINGDOM
Prepared by the European Department
(In consultation with other departments)
Approved by Ajai Chopra and Tamim Bayoumi
July 25, 2011
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July 26, 2011
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Public Information Notice (PIN) No. 11/103
FOR IMMEDIATE RELEASE
August 1, 2011
International Monetary Fund
700 19th Street, NW
Washington, D. C. 20431 USA
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July 27, 2011
