IMF Praises UK Economic Recovery, Advises on Inflation and Fiscal Policies
The International Monetary Fund (IMF) has released a statement following its 2024 Article IV Mission to the United Kingdom, noting that the UK economy is showing signs of recovery after a mild technical recession in 2023.
The IMF highlighted that the UK is nearing a “soft landing,” with growth projected to strengthen further in 2025. The report praised the rapid decline in Consumer Price Index (CPI) inflation, which is expected to reach the Bank of England’s (BoE) target by early 2025.
The UK’s economy grew by 0.6% in the first quarter of 2024, exceeding expectations. This growth signals a stronger-than-anticipated recovery from the recession experienced in late 2023. The IMF now forecasts a 0.7% growth for 2024, a slight increase from earlier predictions.
Growth is expected to rise to 1.5% in 2025, driven by disinflation that boosts real incomes and eases financial conditions. However, the IMF cautioned that long-term growth prospects remain modest due to ongoing issues with labor productivity and high levels of inactivity due to long-term illness.
The IMF noted that disinflation has progressed faster than expected, although inflation in services and wage pressures remain high. As of March, headline and core CPI inflation stood at 3.2% and 4.2% year-on-year, respectively. The BoE’s restrictive monetary policy and lower energy prices have contributed to this rapid decline. However, services inflation and private sector wage growth remain elevated. The IMF projects a durable return to the BoE’s 2% inflation target by early 2025.
With the BoE’s Bank Rate significantly above the estimated neutral rate, the IMF suggests that monetary policy is at a turning point. The IMF recommends careful consideration of the timing and pace of interest rate cuts to avoid premature easing that could stall the recovery, or delayed easing that could lead to extended undershooting of the inflation target. The IMF advises 50-75 basis points cuts in 2024 to balance these risks.
The IMF praised the UK government’s fiscal consolidation efforts since November 2022, which have brought the primary deficit back to pre-pandemic levels. However, it highlighted the challenges ahead, emphasizing the need for difficult choices to stabilize public debt amid pressures on public services and critical investment needs. The IMF advised against recent tax cuts, particularly the reduction in National Insurance Contributions, due to their significant fiscal cost.
The IMF also called for additional spending to address known pressures in public services, especially health and social care, and to meet critical growth-enhancing investment needs, including for the green transition. It suggested that the UK government should consider raising additional revenue through higher carbon and road-usage taxes, broadening the VAT base, and reforming capital gains and property taxation.
The IMF stressed the urgency of ambitious structural reforms to boost the UK’s economic potential and living standards. It recommended easing planning restrictions to facilitate new construction and infrastructure projects, addressing skills shortages through better training and apprenticeships, and improving health outcomes to reduce labor market inactivity due to long-term illness.
The IMF also encouraged the UK to continue its cautious approach to industrial policy and to unlock pension savings for higher-return investments without undermining financial stability.
The IMF highlighted the resilience of the UK’s banking system but advised continued vigilance and strong supervision of all banks, especially smaller ones with diverse business models. It welcomed the UK’s initiatives to better assess and mitigate risks from non-bank financial institutions.
On climate policy, the IMF urged the UK to maintain its ambitious emission reduction targets and increase green investment to meet the 2030 goals. It recommended stronger incentives for private investment in green projects and suggested regulatory measures to encourage household adoption of low-carbon technologies.
The full report detailing the IMF’s findings and recommendations will be presented to the IMF Executive Board for discussion and decision.
