Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] 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 Assessment[2]
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 |
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[1] 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.
[2] 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.
