IMF raises UK growth forecasts as economy 'turns corner'

It had previously embarrassed Chancellor of the Exchequer

By Larry Elliott

Published October 8, 2013 3:59PM (EDT)

The International Monetary Fund has given a boost to George Osborne by raising its growth forecasts for the UK in both 2013 and 2014.

In its half-yearly World Economic Outlook (WEO), the Washington-based fund said national output in Britain would expand by 1.4% this year and by 1.9% in 2014.

Upbeat data since the IMF's last set of forecasts in July led to estimates of growth being upgraded by 0.5 points in 2013 and by 0.4 points in 2014 – the highest for any developed economy.

The fund embarrassed the chancellor in its last WEO, when it called on the UK to ease up on its austerity plans in order to boost the recovery prospects. It repeated the call for higher public spending in its latest assessment.

"In the UK, recent data have shown welcome signs of an improving economy, consistent with increasing consumer and business confidence, but output remains well below its pre-crisis-peak", the fund said.

A spokesperson for the Treasury said: "The IMF has confirmed that the UK economy is turning a corner, by revising up its forecast for growth over the next two years by more than for any other G7 economy. But risks to the global economy remain high, and the recovery cannot be taken for granted. That is why the government will not let up in implementing its economic plan, which has already cut the deficit by a third, kept interest rates near record lows and created over a million and a quarter jobs."

Official figures due out later this month are expected to show that the UK grew by close to 1% in the third quarter following expansion of 0.7% in the three months to June, but GDP will still be below the peak reached before the deep slump of 2008-09.

The fund said growth was expected to return to its long-term trend of 2-2.5% in the medium term but added that output levels would remain below potential for "many years".

It added that further repair work was needed to the UK banking system in order to boost credit and demand, and urged the government to come up with a strategy for returning Royal Bank of Scotland to the private sector following its sale of part of its stake in Lloyds.

Noting that the health of Lloyds and RBS was crucial for credit growth, the WEO said: "A clear strategy is needed for the Royal Bank of Scotland with a view to returning both to private ownership."

The fund gave its backing to the Bank of England's policy of forward guidance, under which Threadneedle Street has pledged to hold interest rates at 0.5% at least until unemployment comes down to 7%.

"Monetary policy should stay accommodative in the UK, and the Bank of England's recently adopted forward guidance framework is an important step toward greater transparency about the factors that will guide policy rates."

But the fund encouraged Osborne to take advantage of cheap borrowing costs to improve the UK's infrastructure, something it said could be done without jeopardising the government's budget plans.

"In an environment of still low interest rates and underutilisation of resources, public investment can also be brought forward to offset the drag from planned near-term fiscal tightening, while staying within the medium-term fiscal framework."

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