On July 23, 2014 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the United Kingdom.1
The economy has rebounded strongly and prospects are promising. Headwinds that previously held back the economy—including adverse credit conditions and diminished confidence—have eased. There are signs that demand is becoming more balanced, with growth in business investment now ahead of private consumption. Employment growth has remained strong. Despite this, inflation has been contained.
Nonetheless, sustaining strong growth will depend on a recovery in productivity growth and real wages. In addition, the housing market is becoming buoyant, potentially creating financial stability risks. Further demand rebalancing is needed: net trade has made only a modest contribution to the recovery, and the real exchange rate is moderately overvalued.
Policies have been directed toward supporting growth, while strengthening public finances through a mix of revenue and expenditure measures and ensuring financial stability. Monetary policy remains highly accommodative, and effective monetary conditions have eased compared with last year. A number of micro-prudential and credit policy measures have been introduced in an effort to take some of the steam out of the housing market, such as modification of the Funding for Lending Scheme and the introduction of tighter underwriting standards for owner-occupier mortgages. The Financial Policy Committee of the Bank of England has also recommended the implementation of macroprudential measures aimed at insuring against excessive household indebtedness. Meanwhile, the 2014 Budget implies a half-percentage point tightening in the cyclically-adjusted primary balance. Going forward, fiscal policy aims to eliminate the budget deficit by FY2018 and to put the debt ratio firmly on a downward path while preserving the delivery of quality public services and paying due attention to social equity.
After the overhaul of the UK’s financial regulatory architecture in 2013, which saw the establishment of the Prudential Regulation Authority, Financial Conduct Authority, and Financial Policy Committee, efforts to strengthen bank balance sheets and implement durable structural reforms to the financial sector have continued. These include higher bank capital and provisioning, a robust multi-pronged framework for assessing capital adequacy, and stress testing of major banks for large shocks. Liquidity backstops have been strengthened, which should help solvent UK banks ride out temporary funding stresses that could otherwise create domestic and outward credit spillovers. But easier access to liquidity requires commensurately strong supervision of banks and other financial intermediaries.
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.
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.