The IMF published its annual ‘health check' of the UK economy yesterday, welcoming the strong rebound in output and employment over the past year, and describing the current policy mix as appropriate given the subdued external environment. However, it was less impressed by the pace of economic rebalancing, the Government's immigration policies, the country's weak export performance and the Bank of England's efforts to communicate its forward guidance framework.
Here are the main points from its Article IV consultation:
A pat on the back…
- … for the robust pick-up in UK demand, with the IMF forecasting full-year GDP growth of 3.2% in 2014, the fastest rate of expansion in the G7.
- … for the Government's austerity strategy, with the IMF supporting its near-term fiscal consolidation efforts (this is a rather different view from 15 months ago, when the IMF had warned that the UK was "playing with fire" over its fiscal plans).
- … for the Bank of England maintaining its accommodative monetary policy stance, given still subdued inflation pressures.
- … for recent measures to raise bank capital and strengthen the resilience of the financial sector.
- … for the introduction of so-called ‘macroprudential measures' aimed at reducing risks from the UK housing market.
A slap on the wrist…
- … for the worsening current-account balance, which recorded a deficit of 4.5% of GDP in 2013, a 24-year high, on the back of a declining income balance and lacklustre exports.
- … for "a lack of competitiveness and limited export diversification" in the UK's external sector, which the IMF believes has contributed to sterling's real exchange rate currently being about 5-10% overvalued.
- … for the UK's "restrictive immigration policies that could have a negative impact on productivity growth". The IMF supports a relaxing of immigration requirements and a loosening of the visa regime for foreign students.
- … for the Bank of England's communications, with the IMF noting that introduction of forward guidance was "associated with some confusion" and that the likely path of future interest rates could be made more transparent.
Productivity the key
While welcoming the strong rebound in economic activity and decent near-term growth prospects, the IMF stressed that a recovery in productivity growth and further demand rebalancing was required for solid growth to be sustained. In addition to the Government's immigration stance on skilled workers from the EU and beyond, the Fund highlighted two other structural supply-side issues that are likely – in the absence of reform – to weigh on the economy's long-run potential growth rate.
The first is infrastructure, with the IMF calling for a reduction in energy and transport bottlenecks and an expansion in public investment projects that could address long-running capacity constraints. The second is education, where the Fund noted the critical importance of investing in human capital, not only to improve the economy's skill base but also to support more inclusive growth. It drew particular attention to the need for a further expansion in vocational training and apprenticeship programmes.
These are the areas – infrastructure, energy, skills, innovation, Europe – that EEF has identified as core priorities ahead of, and well beyond, next year's general election. With the party conference season approaching, we will continue to engage with all parties and stakeholders on these (and other) issues to ensure that UK manufacturing remains front and centre of the policy debate over this and the next parliament, delivering a stronger business environment for more companies to make more in Britain.