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IMF praises UK economy, but warns of risks
15
Dec '15
The International Monetary Fund (IMF) has praised the UK's recent economic record, but warned of a series of risk that could hit its strong economic performance.

"The UK's recent economic performance has been strong, and considerable progress has been achieved in addressing underlying vulnerabilities. Growth has exceeded that of the other major advanced economies, the unemployment rate has fallen substantially, employment has reached an historic high, the fiscal deficit has been reduced, and financial sector resilience has increased," the IMF said in its latest report on UK.

The UK economy remains robust and is one of the developed world's leading economies. The IMF said in its World Economic outlook report in October that it expected the UK to grow a respectable 2.5 percent in 2015 and 2.2 percent in 2016. Unemployment figures for the July-September period showed the jobless rate fell to 5.3 percent, the lowest rate since the March to May 2008.

The IMF said that "steady growth looks likely to continue over the next few years, and inflation should gradually return to target."

According to the report, as labor market slack is used up, growth is predicted to slow slightly in 2016 and to average around 2.25 per cent over the medium term.

With the economy running near capacity, the IMF said growth should be matched by steady increases in employment.

But the IMF, which had clashed with UK's Chancellor George Osborne over his austerity drive in the past, issued some stark warnings on risks to the outlook.

"There are, however, a number of risks to this broadly positive outlook" with domestic and external imbalances persisting and there were risks of various "shocks".

It listed household debt, current account deficit and fiscal deficit as possible flashpoints.

"House price growth has eased somewhat over the past year, but remains high. The absence of an associated boom in net mortgage lending helps contain financial risks associated with high house prices" the IMF said.

However, it noted that while the share of households borrowing at high loan-to-income multiples has come down, the household debt-to-income ratio has stabilized at a high level despite steady output growth, "leaving some households vulnerable to income and interest rate shocks."

The current account deficit is similarly not a result of funding a household credit boom, but nonetheless is strikingly large, the report said. "Notwithstanding a flexible exchange rate and independent monetary policy, confidence shocks could reduce external capital flows into the UK, which could adversely affect growth."

The 2014-15 fiscal deficit stood at nearly 5 percent of gross domestic product (GDP), with general government gross debt reaching 87 per cent of GDP, despite steady progress in reducing fiscal imbalances.


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