| Click for the Finfacts Ireland Portal Homepage |

Finfacts Business News Centre

Home 
 
 News
 Irish
 Irish Economy
 EU Economy
 US Economy
 UK Economy
 Global Economy
 International
 Property
 Innovation
 
 Analysis/Comment
 
 Asia Economy

RSS FEED


How to use our RSS feed

Follow Finfacts on Twitter

 
Web Finfacts

See Search Box lower down this column for searches of Finfacts news pages. Where there may be the odd special character missing from an older page, it's a problem that developed when Interactive Tools upgraded to a new content management system.

Welcome

Finfacts is Ireland's leading business information site and you are in its business news section.

Links

Finfacts Homepage

Irish Share Prices

Euribor Daily Rates

Irish Economy

Global Income Per Capita

Global Cost of Living

Irish Tax - Income/Corporate

Global News

Bloomberg News

CNN Money

Cnet Tech News

Newspapers

Irish Independent

Irish Times

Irish Examiner

New York Times

Financial Times

Technology News

 

Feedback

 

Content Management by interactivetools.com.

News : UK Economy Last Updated: Jul 29, 2014 - 12:06 PM


IMF says British pound overvalued
By Michael Hennigan, Finfacts founder and editor
Jul 29, 2014 - 3:02 AM

Email this article
 Printer friendly page

The International Monetary Fund (IMF) said on Monday that the UK pound was “overvalued” and preventing the rebalancing of the economy away from a reliance on spending and imports.

In its annual assessment of the UK economy, the fund said sterling, which has risen about 10% against the US dollar over the past year was between 5 and 10% overvalued due to a “lack of competitiveness and limited export diversification.”

The Fund acknowledged that the economy has rebounded strongly and prospects are promising. It said headwinds that previously held back the economy—relating notably to credit conditions and confidence—have eased. "Nonetheless, sustaining strong growth will depend on a recovery in productivity growth and further demand rebalancing. The housing market brings risks of financial vulnerabilities."

It said the current account deficit rose to 4½% of GDP in 2013, explained by a large decline in the income balance and lacklustre export growth while after depreciating by 23% in 2007–09 the real exchange rate has gradually appreciated, and "this trend accelerated from the middle of 2013."

Staff estimates that the current account balance is 2.6% weaker than its equilibrium level, and that the real exchange rate is overvalued by about 5–10%.

The UK economy is projected to grow by 3.2% in 2014, up from 1.7% in 2013. Strong growth is fueling rapid job creation, and inflation is expected to remain low, according to the IMF’s assessment.

It suggests that the Bank of England can keep its benchmark rate stable in the short term.

Speaking to IMF Survey at the launch of the IMF’s regular health check of the UK economy [pdf], Philip Gerson, European Department deputy director and head of the IMF’s UK team, said consumption and investment are the primary drivers of fast growth in 2014.

IMF Survey: The UK economy has grown quickly. What are the factors explaining the rebound?

Gerson: The UK’s recent economic performance has been surprisingly strong. A year ago we—and most other forecasters—were expecting that growth this year would be about 1½%, but growth now looks to be about double that. Growth also seems to be increasingly broad based. At the start of the recovery, growth was very dependent on consumer spending. The rebound in spending seems to have been associated with an increase in consumer confidence and easier credit conditions. But more recently business investment has also picked up strongly, as firms too have grown more confident about the state of the economy.

So we are much more optimistic now than we were a year ago about both the current pace of the recovery and about prospects for future growth, although of course there are always risks on the horizon.

IMF Survey: Can you explain these risks on the horizon?

Although the overall outlook is positive, some key domestic and external risks remain. Domestic risks include uncertainty about future productivity growth and the potential for financial risks stemming from the housing market. External risks include the unwinding of unconventional monetary policies in the U.S., weaker-than-anticipated growth in emerging and advanced economies, and increased geopolitical tensions.

IMF Survey: How serious are housing market risks for the UK economy?

Gerson: Housing prices have been growing very rapidly in London, and recently in the rest of UK as well (by about 20 and 10%, respectively). We’ve seen before in the UK and in other advanced economies how rapid house price inflation can contribute to financial risks, with serious implications for the rest of the economy. Rising house prices can lead some borrowers to take out mortgages that are very large relative to their incomes, leaving them vulnerable to shocks to interest rates or to their incomes.

The authorities have taken a number of steps to try to contain financial risks associated with rapid house price growth. For example, they are introducing limits on the share of new mortgages banks can grant that feature very high ratios of loan amounts to borrower incomes. Banks are also being required to run more strenuous tests of loan affordability. We agree that these types of “macroprudential measures” to address systemic financial risks are the appropriate first line of defense, and that early action like this is warranted, especially as it may take time for these measures to have an impact. The effects of these measures will need to be monitored carefully, and settings may need to be modified over time to maximize their benefits.

At the same time, the fundamental factor driving housing price growth is inadequate supply of housing, and political consensus to fix this is essential. Recent reforms to the planning system are helping, but more needs to be done to lift unnecessary constraints on development, to ensure that the tax system encourages the most efficient use of land, and to further develop markets for rental housing.

IMF Survey: Should UK monetary policy continue to remain accommodative, or should we expect some tightening? And how about the pace of fiscal consolidation?

Gerson: Monetary policy should stay accommodative for now. Inflation is low and stable, wage growth has been slow, and although output growth has picked up, the recovery remains at an early stage and there is still slack in the economy. Until we see signs that inflation is rising, or that costs are running ahead of productivity growth, monetary policy should continue to support the recovery.

An accommodative monetary policy can also help offset some of the impact from further fiscal consolidation. The UK authorities have undertaken substantial deficit reduction in recent years, but the deficit this year is still likely to be very high, at close to 5% of GDP. The planned pace of deficit reduction this year looks appropriate. Over the medium term, fiscal policy should continue to aim to put debt on a firmly declining path while supporting long-term growth through adequate public investment and safeguarding social needs by protecting social expenditure. Given the scale of the effort that will be required, the authorities should look to measures on both the revenue and expenditure sides.

So overall the policy mix being followed by the authorities looks appropriate, with an accommodative monetary policy that is providing support to the recovery and fiscal consolidation that aims to bring down deficits and put the debt ratio on a downward path.

Related Articles
Related Articles


© Copyright 2011 by Finfacts.com

Top of Page

UK Economy
Latest Headlines
UK in 28th rank of 30 advanced OECD nations for health resourcing: Economist Intelligence Unit
Business on a Shoestring: Keeping startup costs low in UK and Ireland
UK "underlying growth has stopped"
41,000 London properties held by foreign companies - 90% in tax havens
UK GDP rose 2.6% in 2014 up from 1.7% in 2013
Northern Ireland private economy contracted in December 2014
Northern Ireland may have a 12.5% corporation tax rate from 2017
UK moves ahead on 'Google tax' despite criticism
PwC charged with "selling tax avoidance on an industrial scale"; indulging in "scams"
Income inequality damages economies; Rich-poor gap highest in 30 years
Cameron warns of risk of another global recession
Only 80,000 of 1.1m UK jobs added since 2008 were full-time employee positions
UK added 112,000 jobs in third quarter; Pay inches above inflation - first time in 5 years
Germany and UK agree to restrict 'patent box' tax incentives to local R&D
German retailer Aldi to create 35,000 new jobs in UK by 2022
UK GDP growth slowed in the three months to September
UK retail sales fell in September; Tesco, Debenhams, Foxtons report market stress
UK faces more austerity and less chance of tax cuts
Globalization, the underclass and the need for a new model - Part 2
Northern Ireland PMI shows sharp increase in activity
UK economic growth revised up - above pre-recession level
London world’s most expensive city for companies to locate employees
UK retail sales in August best performance since January
UK economy added more net jobs in past 4 years than rest of the EU combined
UK to announce stiffer penalties for offshore tax evaders
UK economy since launch of the euro in 1999
IMF says British pound overvalued
UK profit warnings reach highest first half total since 2011
UK GDP up 3.1% in 12 months to end Q2 2014; Economy overtakes pre-crisis 2008 peak
Wealthy foreign students overtake finance professionals as renters in prime Central London areas
UK attracts most inward investment projects since records began in 1980s
Trends in UK and US part-time and self employment since 2008
UK labour participation at 73% - highest in decade; US at 63% - lowest since 1978
More than 20,000 client names of Jersey tax haven bank leaked
UK house prices overtook their 2007 peak in Q2 2014
UK recovery continues at robust pace
UK employment rose again at a record pace in the three months to April
UK tax revenues rose to record in 2013/2014 with help from tax dodgers
Overseas visits to London in 2013, up 43.5% in 10 years
UK economy grew 0.8% in Q1 2014; Almost back to 2008 peak