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
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
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
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.
Survey: The UK economy has grown
quickly. What are the factors explaining the rebound?
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.
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
Survey: How serious are housing
market risks for the UK economy?
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
Survey: Should UK monetary policy
continue to remain accommodative, or should we expect some tightening? And how
about the pace of fiscal consolidation?
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
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.