20220222-IMF-United_Kingdom_2021_Article_IV_Consultation-Press_Release_Staff_Report_and_Statement_by_the_Executive_Director_for_the_United_Kingdom_109页_12mb

IMF 2021 Article IV Consultation with the United Kingdom Summary

Core Content

The IMF conducted the 2021 Article IV consultation with the United Kingdom, assessing its economic developments, policies, and financial stability. The consultation was followed by a discussion on the findings of the Financial Sector Assessment Program (FSAP). The Executive Board concluded the consultation on February 16, 2022, and the Staff Report was finalized on February 1, 2022. The consultation took place from November 29 to December 14, 2021, with a virtual mission and extensive discussions with UK officials and stakeholders.

Main Points

Economic Recovery and Challenges

• Rapid Recovery: The UK's economy recovered faster than expected in 2021, driven by continued policy support and a rapid vaccination campaign.
• Growth Projections: Growth is projected at 4.7% for 2022, with a slowdown expected in the medium term to about 1.5%.
• Inflation: Inflation reached 5.4% at the end of 2021 due to global supply chain issues, rising energy prices, and tight labor markets. It is expected to peak at around 7% in early 2022 before gradually returning to the target by 2024Q2.
• Real GDP: Real GDP is projected to remain about 2–2.5% below its pre-pandemic trend in the medium term, due to investment shortfalls and incomplete labor force recovery.

Fiscal and Monetary Policy

• Fiscal Policy: The UK has transitioned from broad support to a more targeted approach, with a back-loaded consolidation plan. Fiscal automatic stabilizers are being strengthened to protect marginalized workers and small businesses.
• Monetary Policy: The Bank of England (BoE) raised the policy rate in December and February 2022 to counter inflation, which was above target. Macroprudential policies are returning to standard risk settings.
• Fiscal Rules: New fiscal rules were introduced, and the IMF encouraged a structured commentary on their alignment with fiscal objectives.

Financial Stability and Risks

• Financial Stability Framework: The UK's financial stability framework is well-functioning and aligned with global standards, helping to maintain safety and soundness during the pandemic and Brexit.
• Non-Bank Financial Institutions (NBFI): Data and information gaps on NBFI and their cross-border operations remain a challenge. The sector is global and complex, requiring enhanced data collection and international coordination.
• Systemic Risks: The UK is exposed to systemic risks from new waves of the pandemic, spillovers from Eastern Europe tensions, and potential shifts in financial conditions.

Structural Transformation and Policy Priorities

• Build Back Better Agenda: The UK's "Build Back Better: Our Plan for Growth" aims to drive structural transformation for green and inclusive growth. Implementation challenges remain, particularly with "leveling up" and finalizing the post-Brexit trade and financial sector framework.
• Policy Priorities:
  • Continue rotating policies to support non-inflationary growth.
  • Adjust policy design to better manage volatility, including through fiscal automatic stabilizers and monetary policy operational changes.
  • Strengthen policy frameworks to anchor expectations and preserve policy space.
  • Accelerate the "Build Back Better" agenda and enhance the Net Zero Strategy.

Key Information

Economic Indicators (2018–2022)

Exchange Rates

• Exchange Rate Regime: Floating
• Bilateral Rate (December 31, 2021): USD$1 = £0.7420
• Nominal Effective Rate (year average): 102.4 (2021)
• Real Effective Rate (year average): 102.4 (2021)

Balance of Payments

• Current Account Balance (percent of GDP): -3.4 (2021), projected to -4.7 to -4.3 in 2022
• Trade Balance (percent of GDP): -1.1 (2021), projected to -2.4 to -2.1 in 2022
• Net Exports of Oil: 0.1 (2021), projected to 0.1 in 2022
• FDI Net (percent of GDP): 1.0 (2021), projected to 0.8 to 0.2 in 2022

Risk Assessment

• Near-Term Risks: Higher inflation, medium-term growth scarring, and new waves of the pandemic.
• Medium-Term Risks: Lower growth due to policy interventions pulling inflation back, and spillovers from Eastern Europe tensions.
• Financial Sector Risks: Interconnectedness of markets, cross-border risks, and vulnerabilities in non-bank financial institutions.

Conclusion

The UK has navigated significant challenges in 2021, including the resurgence of the pandemic and post-Brexit uncertainties, while achieving a faster-than-expected economic recovery. However, the economy faces considerable risks in the near and medium term, primarily from inflation, structural scarring, and potential new waves of the virus. The IMF emphasized the need for continued vigilance in financial stability, enhanced data collection, and international coordination. It also called for strengthening fiscal automatic stabilizers and aligning fiscal rules with long-term objectives. The UK's "Build Back Better" agenda is seen as a key driver for structural transformation and inclusive growth, but implementation remains a challenge. The financial sector, while resilient, requires further attention to systemic risks and regulatory reforms.