UK Economy Rebounding Strongly

GDP growth is strong and becoming more balanced

Growth fueling job creation, inflation expected to remain low

Risks from uncertainty about future productivity growth and the housing market

Speaking to IMF Survey at the launch of the IMF’s regular health check of the U.K. economy, 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 percent, 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 percent, 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...