|Prime Minister David Cameron and world-champion gymnast Beth Tweddle (centre) meet Special Olympians at 10 Downing Street in London, before they depart for the Special Olympics 2011 in Athens, June 06, 2011.
George Osborne, UK chancellor, on
Monday welcomed the support of the International Monetary Fund (IMF) for UK
economic policy. Meanwhile, UK retail sales fell in May.
The IMF said in a report on
the UK economy that “strong fiscal consolidation was under way and remained
essential to achieve a more sustainable budgetary position, thus reducing fiscal
Launching the fund’s annual assessment at the Treasury, Osborne said: “The
IMF have publicly asked themselves the question of whether it is time to adjust
macroeconomic policies - - in other words, ‘is it time to change course?’,”
he said. “They have concluded definitively that the
answer is no.’’
Meanwhile, the latest British Retail
Consortium-KPMG monthly survey shows that UK retail sales values were 2.1% lower
on a like-for-like basis from May 2010, when sales had risen 0.8%. On a total
basis, sales were down 0.3%, against a 3.0% increase in May 2010.
Food sales slowed markedly after
April's strong growth and non-food sales were also much weaker. As the weather
cooled, consumers' underlying uncertainty about jobs and incomes resurfaced,
hitting clothing, footwear and homewares. Big-ticket purchases suffered most and
were often promotion-led.
Non-food non-store (internet,
mail-order and phone) sales growth slowed in May, but the comparison was with a
very strong May 2010. Sales were 10.4% higher than a year ago, compared with
13.7% in April but over 20% in May 2010.
The UK economy is
facing an uneven recovery, with growth of 1.5% expected in
2011, according to the IMF’s
“The UK economy is recovering from the impact of the financial
crisis,” Acting Managing Director John Lipsky said Monday at a
press conference in London.
“However, growth was flat in recent quarters as spiking
commodity prices - - together with a still-weak housing market - -
weighed on consumer confidence. At the same time, headline inflation
has accelerated, reflecting both the spike in commodity prices and
large indirect tax hikes.”
These developments raise the question whether it is time to
adjust the macroeconomic policy strategy. According to IMF staff
analysis, the answer is “no,” as the deviations from the
expected economic trajectory are likely to be largely temporary.
“The current mix of tight fiscal and loose monetary policy
remains appropriate in staff's central scenario. But uncertainty
around this central scenario remains high. The potential policy
response would depend on the specific risk that might arise,”
New focus on spillover effects and financial sector
The press conference wrapped up the IMF’s annual analysis of the
UK economy, which has involved meetings with senior officials from
the government, the Bank of England, the Financial Services
Authority, and representatives from the private sector.
This year’s consultation is particularly notable because it
integrates the findings of two other special IMF reports: a
comprehensive and in-depth analysis of the UK’s financial sector,
carried out under the auspices of the IMF’s Financial Sector
Assessment Program (FSAP), and a new focus on “spillover effects”
- - the impact that one country’s policies can have on
other countries because of the tremendous increase in trade and
financial linkages in the global economy.
Analysis to support policy collaboration
The reports reflect the IMF’s strong commitment to furthering
policy collaboration at the international level through an improved
understanding of the interconnected nature of the global economy.
This year, the institution is undertaking
in-depth analysis of the outward spillovers from the five
largest economies in the world—China, the euro area, Japan, the
United Kingdom, and the United States. The work is a natural
continuation of the IMF’s efforts in the aftermath of the global
economic crisis to support international policy collaboration aimed
at reducing global economic imbalances that threaten the recovery.
The UK mission is the first to include the spillover element,
with discussions focusing mainly on the stability and efficiency of
the financial system, given the global reach and importance of the
country’s financial sector. Japan will follow on June 8, China on
June 9, followed by the euro area on June 20, and the United States
on June 27.
The results of the spillover work will be presented in a series
of reports alongside each country or region’s annual Article IV
report, with lessons brought together in an overarching report that
will be discussed by the IMF’s Executive Board later this summer.
The IMF’s new focus on the interconnected nature of the global
economy comes at a time of increased uncertainty for policymakers
around the world, with the global recovery being buffeted by
continued uncertainty in Europe, uprisings in the Middle East, and
signs of overheating in some fast-growing emerging market economies.
Financial sector a global public good
In September 2010, the IMF made it mandatory for 25 jurisdictions
with systemically important financial sectors to undergo financial
stability assessments under its
Financial Sector Assessment Program (FSAP) every 5 years. This
important decision moved the IMF’s financial sector surveillance
towards a more risk-based approach by focusing resources on member
countries with systemically important financial sectors. Given the
size and role of the UK financial system in global intermediation,
the UK is among the 25 jurisdictions.
In its report, the IMF stressed that the stability of the UK’s
financial sector is important not just for the national economy but
also for global macroeconomic stability. The analysis of spillovers
shows that the size and role of the UK financial system in global
intermediation puts it in a position to originate and transmit
shocks throughout the global financial system―but also to dampen
such shocks, should they occur.
“Our analysis of spillovers from the United Kingdom makes it
clear that UK financial stability not only is in the UK’s best
interest, but also is a global public good,” Lipsky said.
For this reason, the UK must aim to have the highest quality
supervision and regulation in place. Analysis carried out as part of
the IMF’s shows that banks have strengthened their capital and
liquidity positions over the last year. All major banks are ahead of
schedule in their transition to Basel III rules, and have also
reduced their reliance on wholesale and official funding.
However, the IMF says
the recovery process is not yet complete, as highlighted
by analysis carried out under the FSAP. The two large banks with
government stakes have made good progress in the implementation of
their restructuring programs, but it will be important to sustain
these efforts. Stress tests for major banks reveal adequate levels
of capitalization under severe macroeconomic scenarios—with the
caveat that lender forbearance may, in some cases, have masked the
extent of risks, given the high indebtedness of households and
commercial real estate.
Potential losses from exposures to vulnerable European countries
are not a threat as long as shocks do not lead to stresses in core
European banks to which UK banks have large exposures. Major UK
banks have adequate liquidity buffers under most scenarios. But like
other global banks, British banks do remain vulnerable to sustained
disruptions in funding markets, the IMF report noted.
More international cooperation is needed
Looking ahead, IMF says the stability of the UK financial sector
critically depends on a stronger international framework for
oversight of cross-border banks. There are serious limitations to
what the UK can achieve alone, particularly with respect to
institutions that it hosts, such as branches of foreign banks. Gaps
in this domain must be addressed through international cooperation.
The UK authorities should therefore continue to work toward an
ambitious international package of regulatory reform and rigorous
implementation of this package in the European Union. “Little
will be achieved regarding resolvability without progress on
cross-border resolution―and this will require international
consultation and high level political commitment. We therefore are
pleased to see that the UK authorities continue to exercise
leadership on these matters,” Lipsky said.