IMF says UK is on the mend

27 September 2010 0:00 am | Updated: 27 September 2010 4:32 pm | By Lee Jones

The International Monetary Fund says it is confident that the UK economy is moving in the right direction but is still concerned by persistently high inflation.

In its annual assessment of the UK economy, the IMF says the coalition’s deficit reduction plan has improved confidence and while it will stifle growth over the medium term, it will eventually lead to an economic recovery.

It says: “The UK economy is on the mend. Economic recovery is underway, unemployment has stabilised, and financial sector health has improved.

“Meanwhile, the UK authorities should continue to provide leadership and build support for ambitious global reform of financial regulation. Ensuring a smooth transition to a new supervisory architecture at home will also be important to secure a safer post-crisis environment.”

The IMF says it is confident that the UK will avoid a double dip recession and says it will experience a “moderate recovery” with GDP growth of 2 per cent in 2011, rising to 2.5 per cent in the medium term.

The international body also agrees with the predictions of the Bank of England, which predicts reduced inflation over the medium term, but says continued higher-than-expected inflation needs to be controlled, possibly with another round of quantitative easing.

It says: “If the recovery were to weaken and increase disinflationary pressure, asset purchases should resume. Conversely, the central bank must stand ready to start a gradual tightening if output recovers apace and inflation continues to surprise on the upside.

“But another VAT increase in January 2011 will keep headline inflation above target next year. But over time the existing margin of spare capacity, along with fiscal tightening, will impart a significant disinflationary impulse. Inflation should gradually revert to target as temporary effects dissipate and economic slack keeps underlying wage and price pressures in check.”

Citigroup analyst Michael Saunders agrees with the diagnosis from the IMF. He says: “The UK’s prospects of achieving sustained growth and a return to fiscal stability are, we believe, considerably better than generally assumed.”

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