UK Recovery Is Strong - IMF Staff Report

The IMF recently published a staff report showing that the UK economy is growing quickly and the growth is expected to continue. The recent growth has been stronger than expected and the predictions are that growth will continue to be above expectations at about 3% rather than the 1.5% predicted earlier. Growth at the start of the recovery was based on consumer spending and an increase in consumer confidence along with easer credit conditions. Growth is now also due to more business investment as the confidence has spread from consumers to businesses.

The recovery is expected to continue but there are always risks. Domestic risks include uncertainty about future productivity growth and worries about financial risks coming from the housing market. Externally, the unwinding of unconventional monetary policies in the US and weak growth in both emerging and advanced economies and geopolitical tensions are seen as the areas of most risk.

The UK housing market has seen house prices grow very quickly in London and the rest of the UK as well. Rapid house price inflation can lead to serious risks for buyers who borrow more than they can afford leaving them vulnerable to shocks to interest rates or incomes.The authorities have already taken some steps to contain the financial risks. The first line of defence was the 'macroprudential' measures including loan affordability and limits to the share of new mortgages that feature high ratios of loans to incomes. These measures may take some time before they begin to have an impact. The effects will have to be monitored and settings adjusted accordingly if required. Inadequate supply is the main driver of the increase in house prices. Unnecessary constraints on planning should be lifted to ensure the ax system encourages the most appropriate use of land and a consensus reached to relieve the supply problem.

Monetary policy should remain accommodative for now and should support the recovery at least until signs that inflation is rising appear or that costs are increasing above productivity growth.

UK Inward Investment At All Time High

The UK's International Investment Positions (IIP) were published recently by the ONS. Inward investment reached a record high of £936bn in 2012 and outward investment stood at £1,088bn, similar to the levels of 2011. Inward investment means investment in the UK by foreign companies and outward investment means investment abroad by UK companies.

UK companies net investment flows overseas decreased from £60.1bn in 2011 to 26.5bn in 2012. Investment flows to Europe show a disinvestment of £0.7bn in 2012, quite a decrease from the £27.3bn in the previous year. Net earnings from overseas investments by UK companies decreased from £100bn in 2011 to £80.2bn in 2012.

Foreign companies continued to increase their investment in the UK during 2012. Net investment flows increased from £28.9bn in 2011 to £35.4bn in 2012. Net earnings by foreign companies investments in the UK decreased slightly from £44.4bn in 2011 to £42.7bn in 2012.

UK FDI statistics are produced in accordance with international standards set by OECD and IMF and their definitions of FDI and balance of payments respectively. FDI estimates are important for measuring the UK balance of payments and they are used by a number of Government departments for briefing and policy purposes. International organisations like Eurostat, UNCTAD, OECD and the IMF also use the FDI figures for policy, analysis and negotiations and the estimates are also widely utilised by commercial companies, academics and independent researchers.

UK Companies Not Investing Abroad

The number of UK companies valued at over £1m involved in acquisitions and disposals fell from 154 transactions in Q1 2012 to 60 in Q1 2013, a decrease of 94 or 61%. Domestic UK M & As were valued at £1bn in Q1. The value increased by £0.3bn but the number of transactions fell from 61 to 24.

Foreign companies acquisitions in the UK increased by £1.2bn from £2bn to £3.2bn in Q1 2013. The number of transactions fell by 21 from 35 to 14.

Figures for UK companies investing abroad show outward M&A activity at its lowest since records began in 1987. The IMF's latest financial stability report however shows global financial conditions are improving. Confidence in markets is improving and continued improvements are required to prevent the return of financial risks.

Europe Should Be More Decisive On Monetary Union

The IMF have said that Europe's policy makers should to be more decisive in pursuing monetary union. The response to the immediate crisis was bold they said and proved the euro area has the capability to act together when required. They suggest that the operation of European Financial Stability Facility is imperative and should be secured as quickly as possible. They say crisis management is no substitute to the corrective policy actions and fundamental reforms are necessary to reinforce the EMU foundations. In the euro area fiscal responses should be adapted to the individual circumstances of each country. Fiscal sustainability is an important aim that all countries not only European countries have to take into account.

Growth Could be Faster

IMF say that the recovery is taking place more quickly than expected but it is uneven. With the right co-ordination it could be faster and more even with growth of 2.5% or 30 million jobs globally.

Threats include fiscal debts in some countries, possible asset 'bubbles' in emerging economies and the danger that consolidation in some parts of the world could have effects on others.

World leaders will discuss policy options at the coming world leaders summit in Canada. Ministers have already agreed on a number of reforms following the global crisis - greater transparency, stronger capital and liquidity standards, fair and substantial contribution, supervision of hedge funds and credit rating agencies and a single set of global accounting standards.

IMF World Economic Outlook October Report

Economic growth has turned positive after the deep global recession, according to the IMF's World Economic Outlook for October 2009. The main factors were wide ranging and unprecedented public interventions supporting demand and lowering uncertainty and risk in financial markets. They expect the recovery will be slow and subdued. Activity remains well below pre-crisis levels. Manufacturing and a turn in the inventory cycle are leading the recovery. Retail stability is returning and consumer confidence is growing. Looking beyond 2010 sustainable growth will depend on addressing the supply disruptions caused by the crisis and rebalancing global demand.

In the meantime, policies will have to remain focused on restoring financial health and maintaining supportive macro-economic policies until conditions improve still more. Policy makers should prepare to reduce the level of public intervention. They will have to map a course between reducing public interventions to early, risking the progress made so far, or leaving them in place too long, distorting incentives and public balance sheets. Emerging and developing economies are further ahead in the recovery due to the successes of some Asian markets. Eastern European emerging economies have been among the hardest hit and their recovery may be slower.