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IMF Country Report No. 24/203
UNITED KINGDOM
2024 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR UNITED KINGDOM
July 2024
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 2024 Article IV consultation with the United Kingdom, the following documents have been released and are included in this package:
A Press Release summarizing the views of the Executive Board as expressed during its July 1, 2024 consideration of the staff report that concluded the Article IV consultation with the United Kingdom.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on July 1, 2024, following discussions that ended on May 21, 2024, 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 June 14, 2024.
An Informational Annex prepared by the IMF staff.
A Staff Statement updating information on recent developments.
A Statement by the Executive Director for the United Kingdom.
The documents listed below have been or will be separately released.
Selected Issues
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Copies of this report are available to the public from
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© 2024 International Monetary Fund
Press Release
PR24/259
IMF Executive Board Concludes 2024 Article IV Consultation with the United Kingdom
FOR IMMEDIATE RELEASE
Washington, DC – July 1, 2024: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with the United Kingdom.
The economy is approaching a soft landing, with growth recovering faster than expected after a mild technical recession in 2023. Inflation has fallen rapidly to near-target from last year’s double-digit levels, due to the reversal of the energy price shock and the demand impact of tight monetary policy. Growth is projected at a modest 0.7 percent in 2024, strengthening to 1.5 percent in 2025, as disinflation buoys real incomes, monetary policy starts easing, and financial conditions become more accommodative. Fiscal policy has remained tight, continuing to target medium-term debt stabilization, although the last two budgets did include tax cuts aimed at boosting investment and labor supply. Inflation is forecast to temporarily rise from around 2 percent presently to 2.5 percent by end-2024, due to regulated energy price base effects, before returning durably to 2 percent in early 2025.
Longer-term growth prospects remain subdued, due to weak labor productivity growth, population aging and somewhat higher than expected inactivity levels due to long term illness, only partly offset by higher migration numbers. Elevated pressures on public services, notably in health, amidst ongoing industrial action over pay, imply additional headwinds. A number of well-conceived measures to boost weak productivity have also been implemented, but these will not be sufficient to lift productivity to close to pre-GFC levels. Post-Brexit uncertainty has continued to ease, in the context of progress on Irish border arrangements, a careful review of retained EU laws, and resilience in UK services exports. However, UK firms trading with the EU are still adapting to the post-Brexit arrangement.
Risks to growth and inflation are balanced. In the short term, growth could be lower if the anticipated pick-up in consumption from current weak levels does not materialize, or higher in the event of stronger-than-expected second round effects from falling energy prices (this also represents a downside risk to inflation). Alternatively, stronger wage pressures could lend greater persistence to services inflation, with possible repercussions for growth as monetary policy adjusts. The key downside risk to medium-term growth is that productivity and labor supply disappoint relative to expectations. But bold implementation of ambitious structural reforms and AI adoption similarly present an upside risk to growth.
Executive Board Assessment2
Executive Directors recognized that the economy is approaching a soft landing, with growth recovering after a mild technical recession last year and set to accelerate further in 2025, as disinflation boosts real incomes and financial conditions ease. Directors welcomed the rapid decline in inflation since last summer due to easing energy and goods prices, although noted that wage growth and services inflation pressures remain elevated. They agreed that risks to the outlook are balanced.
Directors agreed that with the monetary policy stance reaching a turning point, the risks of premature versus delayed easing should be appropriately balanced. They welcomed the Monetary Policy Committee’s meeting-by-meeting approach to adjusting rates, which remains appropriate given prevailing uncertainty. Pointing to the importance of communication of monetary policy decisions, particularly in a context of divergence from the path of US interest rates, Directors noted that a press conference after each rate decision could be beneficial. They concurred with the importance of articulating a clear rationale for future Quantitative Tightening (QT) plans, as the BoE’s balance sheet approaches its steady-state size. A few Directors supported the high-level principles proposed by staff for BoE capital policies in future rounds of Quantitative Easing/QT. Directors also welcomed the BoE’s commitment to act on the recommendations of the Bernanke Review.
Directors agreed that the main medium-term challenge for fiscal policy will be to better account for public spending needs, while assuredly stabilizing public debt. They observed that, absent a substantial boost to potential growth, stabilizing public debt will require difficult tax and spending choices. Directors recognized that possible revenue-raising measures include stronger carbon taxation and road-usage taxation, broadening the base of VAT and inheritance tax, while reforming capital gains and property taxation. On the spending side, Directors saw scope for savings from reforms to the state pension and noted that any expansion or increase in user charging for public services should effectively protect the vulnerable. They encouraged the authorities to strengthen the United Kingdom’s fiscal framework.
Directors emphasized that more ambitious structural reforms to boost potential growth are needed. They supported staff’s recommendation on the adoption of a stable, long-term growth strategy, backed by an independent growth commission. Directors agreed that particular focus is needed on easing planning restrictions, upskilling the workforce, and improving health outcomes, in order to boost weak productivity growth. They also encouraged the authorities to continue their cautious approach to industrial policy and constructive participation in the WTO. Directors welcomed the United Kingdom’s ongoing progress in reducing carbon emissions and urged the authorities to stay the course on climate policy. They recognized the need for adequate public investment to support the green transition, while recommending stronger feebates to hasten the transition to heat pumps and electric vehicles, as well as a strengthening of emissions trading to support the carbon price.
Directors noted the continued resilience of the financial sector. While agreeing that financial stability risks appear well contained at this time, Directors noted that careful monitoring is warranted, with ongoing strong supervision of banks and NBFIs. Directors welcomed the important initiatives undertaken by the BoE to mitigate risks from NBFIs, including the system-wide exploratory scenario exercise and the design of a backstop lending tool, while encouraging continued progress in closing data gaps. Directors welcomed the preservation thus far in the Edinburgh reforms of the primacy of financial stability objectives but urged continued vigilance. Enhancing the effectiveness of the AML/CFT supervisory regime remains important.
United Kingdom: Selected Economic Indicators
Based on relative consumer prices. An increase denotes an appreciation.
Public sector net debt is defined as public sector gross debt minus liquid assets held by general government and non-financial public corporations. It excludes Bank of England operations. The fiscal year begins in April.
United Kingdom: Selected Economic Indicators
| Per capita GDP (US$): | |||||
|---|---|---|---|---|---|
| Population (million): 68.1 | 49,049 | ||||
| Key export markets:Euro area (36%); US(21%) | |||||
| 2023 | 2024 | 2025 | 2026 | ||
| Est. | Projections | ||||
| Output | |||||
| Real GDP growth (%) | 0.1 | 0.7 | 1.5 | 1.7 | |
| Unemployment | |||||
| Unemployment (%) | 4.0 | 4.2 | 4.1 | 4.0 | |
| Prices | |||||
| Inflation, annual average (%) | 7.3 | 2.7 | 2.1 | 2.0 | |
| Inflation, end-of-period (%) | 4.0 | 2.5 | 2.0 | 2.0 | |
| Public sector finances (fiscal year) | |||||
| Revenue (% GDP) | 40.6 | 40.3 | 40.3 | 40.5 | |
| Expenditure (% GDP) | 44.8 | 43.7 | 43.5 | 43.4 | |
| Public sector overall balance (% GDP) | -4.2 | -3.4 | -3.2 | -2.9 | |
| Public sector cyclically adjusted primary balance (staff estimates) | -1.0 | -0.7 | -0.1 | 0.1 | |
| Public sector net debt (excl. BoE) 2/ | 89.2 | 91.6 | 93.1 | 94.5 | |
| Money and Credit | |||||
| Broad money (% change) | -0.9 | … | … | … | |
| Credit to the private sector (% change) | 0.2 | … | … | … | |
| 3-month interbank rate (%) | 5.0 | … | … | … | |
| Balance of Payments | |||||
| Current account balance (% GDP) | -3.3 | -3.2 | -3.5 | -3.3 | |
| Net FDI (% GDP) | 2.7 | 0.2 | 0.2 | 0.2 | |
| Reserves (end-of-period, billions of US dollars) | 190.5 | … | … | … | |
| Net international investment position (% GDP) | -30.7 | … | … | … | |
| Exchange Rates | |||||
| REER (% change) 1/ | 2.5 | … | … | … | |
Based on relative consumer prices. An increase denotes an appreciation.
Public sector net debt is defined as public sector gross debt minus liquid assets held by general government and non-financial public corporations. It excludes Bank of England operations. The fiscal year begins in April.
United Kingdom: Selected Economic Indicators
| Per capita GDP (US$): | |||||
|---|---|---|---|---|---|
| Population (million): 68.1 | 49,049 | ||||
| Key export markets:Euro area (36%); US(21%) | |||||
| 2023 | 2024 | 2025 | 2026 | ||
| Est. | Projections | ||||
| Output | |||||
| Real GDP growth (%) | 0.1 | 0.7 | 1.5 | 1.7 | |
| Unemployment | |||||
| Unemployment (%) | 4.0 | 4.2 | 4.1 | 4.0 | |
| Prices | |||||
| Inflation, annual average (%) | 7.3 | 2.7 | 2.1 | 2.0 | |
| Inflation, end-of-period (%) | 4.0 | 2.5 | 2.0 | 2.0 | |
| Public sector finances (fiscal year) | |||||
| Revenue (% GDP) | 40.6 | 40.3 | 40.3 | 40.5 | |
| Expenditure (% GDP) | 44.8 | 43.7 | 43.5 | 43.4 | |
| Public sector overall balance (% GDP) | -4.2 | -3.4 | -3.2 | -2.9 | |
| Public sector cyclically adjusted primary balance (staff estimates) | -1.0 | -0.7 | -0.1 | 0.1 | |
| Public sector net debt (excl. BoE) 2/ | 89.2 | 91.6 | 93.1 | 94.5 | |
| Money and Credit | |||||
| Broad money (% change) | -0.9 | … | … | … | |
| Credit to the private sector (% change) | 0.2 | … | … | … | |
| 3-month interbank rate (%) | 5.0 | … | … | … | |
| Balance of Payments | |||||
| Current account balance (% GDP) | -3.3 | -3.2 | -3.5 | -3.3 | |
| Net FDI (% GDP) | 2.7 | 0.2 | 0.2 | 0.2 | |
| Reserves (end-of-period, billions of US dollars) | 190.5 | … | … | … | |
| Net international investment position (% GDP) | -30.7 | … | … | … | |
| Exchange Rates | |||||
| REER (% change) 1/ | 2.5 | … | … | … | |
Based on relative consumer prices. An increase denotes an appreciation.
Public sector net debt is defined as public sector gross debt minus liquid assets held by general government and non-financial public corporations. It excludes Bank of England operations. The fiscal year begins in April.
Title page
UNITED KINGDOM
STAFF REPORT FOR THE 2024 ARTICLE IV CONSULTATION
June 14, 2024
KEY ISSUES
Context and Outlook. The UK economy is approaching a soft landing, following a mild technical recession in 2023. A modest recovery is projected, with 0.7 percent growth in 2024, strengthening to 1.5 percent in 2025. Inflation has fallen rapidly from double digit levels last year in the context of easing energy prices and tight policies. Assuming wage and services inflation continue to moderate from their current elevated levels, inflation should return durably to target in the first half of 2025. The medium-term outlook is affected by significant public spending pressures, notably in healthcare, and the downshift in labor productivity growth post-GFC, exacerbated by recent adverse shocks (Brexit, COVID, energy price surge). Risks to the outlook are balanced. A general election is scheduled on July 4.
Policy Recommendations. The overarching policy objective is to maintain price and financial stability, durably lift per capita growth, and address pressing public spending needs while credibly stabilizing debt.
As monetary policy reaches an inflection point, the timing and pace of rate cuts must carefully balance the risks of premature and delayed easing. In this context, the Quantitative Tightening strategy may need further recalibration as reserves approach the BoE’s steady-state balance sheet size. Moreover, possible divergence from the US Fed’s rate path will place a premium on effective Monetary Policy Committee communication with markets.
The main fiscal policy challenge is how to address pressing service delivery and investment needs, including for the green transition, while assuredly stabilizing debt in the medium-term. Staff’s analysis suggests that, absent a major boost to potential growth, significant additional fiscal effort and, accordingly, difficult tax and spending choices, will be required. There is also a scope to strengthen the fiscal framework by making the fiscal rules more robust, moving to a single fiscal event per year, and introducing a rolling 4–5-year expenditure framework, updated every two years.
To durably lift potential growth and living standards, staff recommends: (i) easing planning restrictions to make the current highly localized and discretionary system of decision-making more streamlined and predictable, reducing construction delays and costs, and enhancing labor mobility; (ii) upskilling the workforce to address skill gaps, particularly in future growth areas such as digital and software, manufacturing, medicine and life sciences, teaching, and construction; and (iii) improving health outcomes in the face of elevated service delivery pressures, through capital and workforce investment in the National Health Service, as well as efficient resource allocation, to ensure inactivity and long term sickness do not scar labor supply. Staff also emphasizes the importance of a clear and stable long-term growth strategy, backed by an independent growth commission.
Continued vigilance of financial stability risks, notably from the non-bank financial institutions (NBFIs) is warranted. Macroprudential settings are appropriate but continued close monitoring of credit conditions and financial stability risks, including stringent stress tests, is merited in future calibrations. In this context, the BoE’s initiatives in the NBFI space—a system-wide stress test including banks and non-banks, and a backstop lending tool for NBFIs—are welcome.
Finally, staff supports a redoubling of policy efforts to credibly achieve the UK green transition targets and maintaining a cautious approach toward industrial policy interventions.
Approved By
Helge Berger (EUR) and Daria Zakharova (SPR)
The mission took place in London during May 7–21, 2024. The staff team comprised S. A. Abbas (head), A. Carella, R. Chen, P. Deb, A. Hodge (all EUR), and E. Kemp (MCM). The mission met Chancellor Hunt, BoE Governor Bailey, FCA Chief Executive Rathi, senior HMT and BoE officials, analysts and think tanks, trade union representatives, and business groups. A wrap-up meeting involving the Managing Director, Chancellor Hunt, and Governor Bailey took place on May 21, followed by a press conference. M. Evio, G. Li (both EUR), K. Chuah (STA), R. Lama, R. Meeks, P. Zabczyk (all MCM), Y. Deng, and L. Malcherek (both LEG) supported the mission. UK Executive Director Ms. Poon and Mr. Obeney (OED) participated in the discussions.
Contents
BACKD ROP
RECENT ECONOMIC DEVELOPMENTS
OUTLOOK AND RISKS
POLICY DISCUSSIONS
A. Monetary Policy
B. Fiscal Policy
C. Reforms to Boost Growth
D. Financial Sector Policies
E. Climate Policies
STAFF APPRAISAL
BOX
1. Transnational Aspects of Corruption
FIGURES
1. Price and Labor Market Developments
2. Credit Developments
3. Inflation Expectations and Monetary Stance
4. Fiscal Projections
5. Real Sector Developments
6. Labor Market Indicators
7. External Sector Developments
8. Fiscal Developments
9. Residential Real Estate Developments
10. Financial Sector
TABLES
1. Conditioning Assumptions Underlying Staff’s Baseline Forecast
2. Selected Economic Indicators , 2019–29
3. Medium-Term Scenario, 2019–29
4. Statement of Public Sector Operations, 2019/20–2028/29
5. Balance of Payments, 2019–29
6. Net Investment Position, 2019–29
7. Monetary Survey, 2016–23
8. Financial Soundness Indicators, 2016–22
9. Anti-Corruption Efforts (Authorities’ Self-Assessment)
ANNEXES
I. Preliminary External Sector Assessment
11. External Debt Sustainability Analysis
III. Growth Accounting and Potential Growth
IV. Drivers of Labor Productivity and Supply in UK
V. Risk Assessment Matrix
VI. Response Rate of the UK’s Labor Force Survey
VII. Fiscal Implications of Post-Pandemic Large-Scale Asset Asset Purchases by the Bank of England
VIII. Bernanke Review of BoE Forecasting & Communications
IX. Staff Policy Advice from the 2023 Article IV Consultation
X. Sovereign Risk and Debt Sustainability Analysis
XI. International Experience with Growth Commissions
XII. FSAP Recommendations
XIII. Pension Reforms
XIV. Data Issues
XV. Authorities’ Update on Edinburgh Reforms
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 summing up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.
