Considerable progress has been achieved in the post-crisis repair of the UK economy. Private-sector indebtedness has been reduced, the financial sector regulatory framework has been overhauled, the fiscal deficit has been cut in half, and the employment rate has reached a record high. With the output gap now nearly closed, growth is expected to average near its potential rate of around 21/4 percent over the medium term, with inflation rising slowly from its current low levels to the 2 percent target by end-2017. However, this benign baseline is subject to risks, including those related to potential shocks to global growth and asset prices, still-high levels of household debt, the elevated current account deficit, and the degree to which productivity growth will recover. Uncertainty associated with the outcome of the forthcoming referendum on EU membership could also weigh on the outlook. Continued efforts are needed to complete the post-crisis repair, promote growth, and further bolster resilience.

Abstract

Considerable progress has been achieved in the post-crisis repair of the UK economy. Private-sector indebtedness has been reduced, the financial sector regulatory framework has been overhauled, the fiscal deficit has been cut in half, and the employment rate has reached a record high. With the output gap now nearly closed, growth is expected to average near its potential rate of around 21/4 percent over the medium term, with inflation rising slowly from its current low levels to the 2 percent target by end-2017. However, this benign baseline is subject to risks, including those related to potential shocks to global growth and asset prices, still-high levels of household debt, the elevated current account deficit, and the degree to which productivity growth will recover. Uncertainty associated with the outcome of the forthcoming referendum on EU membership could also weigh on the outlook. Continued efforts are needed to complete the post-crisis repair, promote growth, and further bolster resilience.

Fund Relations

(Data as of December 31, 2015)

Membership Status: Joined December 27, 1945; accepted Article VIII.

General Resources Account

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SDR Department

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Outstanding Purchases and Loans: None

Financial Arrangements: None

Projected Payments to Fund (SDR million; based on present holdings of SDRs):

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Exchange Rate Arrangement:

The UK authorities maintain a free floating regime.

The United Kingdom accepted the obligations of Article VIII, Sections 2, 3, and 4 on February 15, 1961. It maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions, except for exchange restrictions imposed solely for the preservation of national or international security. In accordance with UN resolutions and EU restrictive measures, the United Kingdom applies targeted financial sanctions under legislation relating to Al-Qaeda and Taliban, and individuals, groups, and organizations associated with terrorism; and certain persons associated with: the former Government of Iraq, the former Government of Liberia, the current Government of Burma (aka Myanmar), the former Government of the Republic of Yugoslavia and International Criminal Tribunal Indictees, the current Government of Zimbabwe, the current government of Belarus, the current government of North Korea; the current government of Iran and persons considered to be a threat to peace and reconciliation in Sudan, Cote d’Ivoire, and Democratic Republic of Congo; and persons considered by the UN to have been involved in the assassination of former Lebanese Prime Minister Rafik Hariri. These restrictions have been notified to the Fund under Decision 144–(52/51).

Article IV Consultation:

The last Article IV consultation was concluded on July 23, 2014. The UK is on the standard 12 –month consultation cycle.

FSAP

The FSAP update was completed at the time of the 2011 Article IV Consultation. A mandatory financial stability assessment is also expected to be conducted in time for the 2016 Article IV consultation, in line with the five-year cycle for members or members’ territories with financial sectors that are determined to be systemically important pursuant to Decision No. 15495-(13/111), adopted December 6, 2013.

Technical Assistance: None

Resident Representatives: None

Statistical Issues

Economic and financial data provided to the Fund are considered adequate for surveillance purposes. The United Kingdom subscribes to the Special Data Dissemination Standard (SDDS) and meets the SDDS specifications for the coverage, periodicity, and timeliness of data. SDDS metadata are posted on the Dissemination Standard Bulletin Board (DSBB). The UK has adopted the European System of National and Regional Accounts 2010 (ESA 2010) and the Balance of Payment and International Investment Position Manual, sixth edition (BPM6).

The UK government has commissioned a review of the UK’s current and future statistical needs and the capacity to meet those needs, prompted by increasing difficulty in measuring output and productivity and a perception that official data could be improved. An interim report, published in December 2015, found that conventional statistical measures and methods are increasingly challenged as the UK economy becomes more service oriented, as businesses operate more across national borders, as digitization of economic activities increases, and the boundaries between market and home production become more blurred. These issues are relevant to a number of advanced and transition economies. The interim report recommends a number of specific steps, such as greater integration of data sources and use of administrative data, addressing shortcomings to national accounts and flow of funds measures, and improvements to UK trade, construction, and CPI statistics. Staff welcomes these recommendations. The final report will be published by the March 2016 Budget.

Table of Common Indicators Required for Surveillance

(As of January 15, 2016)

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Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local government

Including currency and maturity composition.

6 Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

United Kingdom: 2015 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for United Kingdom
Author: International Monetary Fund. European Dept.