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IMF report on UK

IMF report on UK

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Published by: anon_203228282 on Jul 19, 2012
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©2012 International Monetary Fund
IMF Country Report No. 12/190
 Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions withmembers, usually every year. In the context of the 2012 Article IV consultation with the UnitedKingdom, the following documents have been released and are included in this package:
Staff Report
for the 2012 Article IV consultation, prepared by a staff team of the IMF,following discussions that ended on May 22, 2012, with the officials of the United Kingdomon economic developments and policies. Based on information available at the time of thesediscussions, the staff report was completed on July 2, 2012. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the ExecutiveBoard of the IMF.
Informational Annex
Staff Supplement
of July 10, 2012 updating information on recent developments.
Staff Statement
of July 13, 2012 updating information on recent developments.
Public Information Notice
(PIN) summarizing the views of the Executive Board asexpressed during its July 16, 2012 discussion of the staff report that concluded the Article IVconsultation.
Statement by the Executive Director
for the United Kingdom.The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.Copies of this report are available to the public fromInternational Monetary Fund
Publication Services700 19
Street, N.W.
Washington, D.C. 20431Telephone: (202) 623-7430
Telefax: (202) 623-7201E-mail:publications@imf.orgInternet: http://www.imf.org
International Monetary FundWashington, D.C.
July 2012
Recovery has stalled
. Post-crisis repair and rebalancing of the UK economy is likely tobe more prolonged than initially envisaged. Confidence is weak and uncertainty is high.Looking ahead, the economy is expected to grow modestly, but with current policysettings the pace will be insufficient to absorb significant slack in the economy, raisingthe risk of a permanent loss of productive capacity.
Demand support is needed
. More expansionary demand policies would close theoutput gap faster and reduce the risk of hysteresis. In particular:
Additional monetary stimulus via quantitative easing and possibly cutting thepolicy rate is required.
Credit easing measures announced in June to lower borrowing costs throughprovision of bank funding, as recommended in staff’s May 2012concluding statement, are welcome and may need to be expanded.
Budget neutral reallocations should be undertaken to make room to increasegovernment spending on items with higher multipliers (e.g., public investment).
The planned pace of structural fiscal tightening will need to slow if the recoveryfails to take off even after additional monetary stimulus and strong credit easingmeasures. The UK has the fiscal space to make such adjustments.
Further steps are needed to fortify financial sector stability
. Such stability is criticalto anchor a strong and durable recovery in the UK and is also of global systemicimportance as highlighted in spillover analysis. To this end, policies should aim to:
Strengthen bank balance sheets by building capital rather than reducing assets.
Address “too big to fail” issues, including by legislating reforms proposed by theVickers Commission, resisting pressure to reduce their effectiveness.
Intensify supervision and broaden its authority over financial holding companies.
Broaden the macroprudential toolkit to help restrain future property bubbles.
July 2, 2012
Approved By
Reza Moghadam andDavid Marston
Discussions took place in London during May 9-22, 2012. The staff team comprised Messrs. Chopra (head), Srinivasan, Fletcher, Kannan,Sandri, Takizawa and Ms. Ruiz-Arranz (EUR); Ms. Elliot (MCM) and Ms.Asmundson (SPR). Mr. Teja (SPR) joined for discussions on spillovers.The Managing Director joined for the concluding discussions. UKExecutive Director Mr. Gibbs and Mr. Perks (OED) participated in thediscussions.
THE FOCUS OF THE CONSULTATION ___________________________________________________________ 4
RECOVERY HAS STALLED ________________________________________________________________________ 4
A. Large Imbalances Have Produced Headwinds for Growth _______________________________________4
B. Growth Has Stagnated and the Output Gap Remains Large _____________________________________5
C. Internal Rebalancing Has Not Fully Materialized ______________________________________________ 10
D. Progress Has Been Made in Rebalancing Toward External Demand __________________________ 19
OUTLOOK, RISKS, AND POLICY IMPLICATIONS _______________________________________________ 21
MONETARY AND CREDIT EASING POLICIES __________________________________________________ 30
A. Monetary Policy _______________________________________________________________________________ 30
B. Credit Easing and Bank Funding Policies ______________________________________________________ 32
FISCAL POLICY __________________________________________________________________________________ 35
A. Fiscal Consolidation Has Been Strong and is Now Slowing ____________________________________ 35
B. Budget-Neutral Reallocations Can Further Support Growth ___________________________________ 37
C. If the Recovery Remains Stalled, then Fiscal Tightening Should Slow _________________________ 38
FINANCIAL SECTOR POLICIES __________________________________________________________________ 40
A. Strengthening Bank Balance Sheets ___________________________________________________________ 40
B. Strengthening the Framework for Financial Sector Stability ___________________________________ 41
THE AUTHORITIES’ VIEW _______________________________________________________________________ 43
STAFF APPRAISAL ______________________________________________________________________________ 45

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