However, the UK imbalances are not “excessive” – unlike those in Spain and Slovenia - says the Commission’s report.
It concludes that in Spain, very high domestic and external debt levels continue to pose risks for growth and financial stability.
While in Slovenia, the risk of financial sector stability stemming from corporate indebtedness and deleveraging is substantial, including through interlinkages with the level of sovereign debt.
The Commission has also published analyses of imbalances in Belgium, Bulgaria, Denmark, France, Italy, Hungary, Malta, the Netherlands, Finland and Sweden.
Greece, Ireland, Portugal and Cyprus are not included as detailed policy remedies are agreed separately for Eurozone countries receiving EU/IMF loans.
“Our transformed economic governance enables us to address macroeconomic imbalances pre-emptively and to create the foundations for sustainable growth,” said Olli Rehn, Commission Vice-President for Economic and Monetary Affairs and the Euro.
“Decisive policy action by Member States and at EU-level is helping to rebalance the European economy. But significant challenges remain: it will take some time yet to complete the unwinding of the imbalances that were able to grow unchecked in the decade up to the crisis, and which continue to take a toll on our economies.”
Summary of the findings for the UK
In particular, macroeconomic developments in the areas of household debt, linked to the high levels of mortgage debt and the characteristics of the housing market, as well as unfavourable developments in external competitiveness, especially as regards goods exports and weak productivity growth, continue to deserve attention.
More specifically, the UK faces tensions between the needs for deleveraging, maintaining financial stability and avoiding compromising investment and growth. The primary cause of the growth in household debt was high and volatile house prices, linked to an insufficient and rigid supply of housing.
Household deleveraging continued in 2012 and house prices corrected further but this may not be sustained once the economy improves and housing transactions return to more normal levels.
Policy measures have been introduced aiming at increasing residential construction, although it is not yet clear whether they will prove effective.
As a consequence of a combination of high house prices and the widespread and growing use of variable-rate mortgages, households are particularly exposed to interest rate changes.
The stock of UK corporate debt is modestly high yet some firms are having difficulty accessing adequate funding for investment.
The UK is also confronted with the twin challenge of sustaining the pre-crisis dynamism in service exports and boosting the underlying drivers of productivity in the industrial sectors in order to regain the external competitiveness that was partly eroded in the pre-crisis years.
The net trade outturn for 2012 was lower than expected.
Overall public investment remains low and it is not clear when and to what extent private investment will pick-up.
On current policies, the flow of credit may only be normalised once broader macroeconomic conditions improve.
Skill gaps persist and closing them will require a substantial long-term investment.
Given the size of the British economy, the imbalances may generate spill-overs to the other European economies.