United Kingdom and Canada


United Kingdom reaps benefits from strong reforms and sound policy frameworks. Uncertainties remain. Preparing for risks.


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Since 1995, the United Kingdom and Canada have seen steady and relatively strong growth. Although their economies differ in many ways, the instruments used to achieve success have common features: solid institutional and policy frameworks, a strong commitment to fiscal rules, and assiduous implementation of structural reforms. The outlook for both economies remains promising, though they also face uncertainties and risks.

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United Kingdom reaps benefits from strong reforms and sound policy frameworks

Over the past decade,U.K. economic growth has been steady and stronger than in most other major industrial countries thanks to the rigorous implementation of structural reforms, improvements in macroeconomic policies, and well-designed policy frameworks. The economy is operating at close to full capacity and is expected to continue growing at about 2 1/2 percent a year, the IMF reported in its latest economic review.

Domestic demand remains the key driver of growth, underpinned by continued strong growth of real labor earnings and house prices, and robust corporate profitability. Unemployment has fallen to a 30-year low, nominal wage growth has been moderate, and inflation remains subdued. "The U.K. economy has benefited enormously from structural reforms during the 1980s that substantially increased flexibility, and the introduction in the late 1990s of clear and simple macroeconomic policy rules," said Susan Schadler, Deputy Director of the IMF's European Department and mission chief to the United Kingdom. "In addition, a large fiscal adjustment in the late 1990s and other favorable developments, such as improving terms of trade and rising property prices, have bolstered performance."

Uncertainties remain

The economy is well positioned to sustain growth over the medium term, but uncertainties and challenges born of the recent economic success remain. "The most immediate risks come from U.K.-specific factors-the widely perceived overvaluation of house prices, which could see an abrupt correction, and the potential for wage pressures in the context of low unemployment--as well as external influences such as a possible unwinding of global trade imbalances," Schadler said. The housing market has recently cooled, and house prices are expected to decline modestly in 2005.

The U.K. fiscal...

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