United Kingdom enjoys fruits of reforms
| Author | Anthony Annett and James Morsink |
| Position | IMF European Department |
| Pages | 101-115 |
Page 101
The U.K. economy is harvesting the fruits of two decades of sustained labor and product market reforms to reap the rewards of globalization. Anchored by sound monetary and fiscal policy frameworks, the United Kingdom has also been able to respond flexibly to shocks. At the same time, energy price increases have boosted inflation, which in turn has pushed up inflation expectations to their highest level in years. If last year's energy price increases push up pay deals, the Bank of England (right) may need to further increase interest rates.
Page 114
The United Kingdom's macroeconomic performance over the past decade has been enviable. Not only has it secured the highest per capita GDP growth among the Group of Seven major industrial countries (see Chart 1), but it has done so with the lowest volatility while maintaining low and stable unemployment and inflation.
In many respects, the recent U.K. experience is an example of preparation meeting opportunity. The economy has managed to harvest the fruits of two decades of sustained labor and product market reforms to reap the rewards of globalization in recent years (see table). Anchored by sound monetary and fiscal policy frameworks, the United Kingdom has also been able to respond to shocks in a flexible manner. But globalization is an ongoing process, and its future currents are hard to predict. This presents clear challenges for the country because, given its openness and integration with the world economy, global shocks can have immediate and sizable effects. Against this backdrop, macroeconomic and financial policies will need to be ready to help cushion the economy from future shocks.
Conditions are in place for continued robust growth and stability. Following a mild slowdown in 2005, growth has rebounded in the past year, driven largely by domestic demand.
Consumption has rallied on the back of solid employment and wage increases, alongside rising housing wealth, while investment has responded to high net rates of return. Economic slack has diminished accordingly. At the same time, energy price increases have boosted inflation, which in turn has pushed up survey measures of inflation expectations to their highest level in years. In light of these developments, the Bank of England tightened monetary policy starting in...
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