Economy: IMF Makes UK Growth Forecast U-Turn

By Ed Conway, Economics Editor, In Washington

The International Monetary Fund (IMF) has upgraded its forecast for UK economic growth by more than any other major economy, in a boost to the Chancellor's fortunes.

It comes only six months after the IMF downgraded its expectations for the British economy and warned that George Osborne's policies were the economic equivalent of "playing with fire".

In its six-monthly World Economic Outlook, the IMF predicted that the UK's gross domestic product - the broadest measure of economic growth - would increase by 1.4% this year and 1.9% in 2014.

That compares to a forecast of just 0.9% and 1.5% respectively when it last updated its projections in July.

It came as the IMF downgraded its forecast for global GDP this year by 0.3 percentage points to 2.9%.

The rapid change in attitude will be welcomed by the Chancellor, who is due to attend the IMF's annual meeting in Washington later this week.

In April, IMF chief economist Olivier Blanchard warned that austerity policies of the kind Mr Osborne was carrying out were "playing with fire" and urged him to change course.

However, over the following months, the IMF appeared to water down its prescription.

Ed Balls argues the UK economy remains below its potential

Treasury insiders see today's forecast revision as a tacit acknowledgement that Mr Osborne's original course was the right one.

A spokesman 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."

However, the text of the IMF report itself did not offer a ringing endorsement of the UK economy.

"In the United Kingdom, 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 … output levels will remain below potential for many years," it said.

Labour Shadow Chancellor Ed Balls said: "After three wasted years of flatlining it's good that we finally have some growth. But this is the slowest recovery for 100 years and working people are worse off as prices continue rising faster than wages.

"Despite these welcome changes to its forecasts the IMF rightly warns that the UK economy will remain below potential for many years.

"That's why the IMF has repeated its view that the Government should bring forward infrastructure investment now, which could be used to build thousands of affordable homes.

"Instead of more complacency from George Osborne we need action to secure a strong and sustained recovery, catch up all the lost ground and tackle the cost of living crisis," he concluded.

The report said that the global economy was now beginning to recover from the Great Recession, but warned that central banks would find it difficult to bring the unprecedented series of emergency crisis measures to an end.

George Osborne (R) will see the U-turn as a vindication of his policies

The Federal Reserve has signalled that it will soon begin tapering the amount of assets it is buying each month under its quantitative easing programme, but stopped short of doing so at its meeting last month.

It said that the world would have to adapt to a slower potential growth rate from China - for the past five years the powerhouse for global growth.

However, the IMF reserved its most serious warning for the US Congress, which is currently deadlocked on talks over the budget, causing a part-shutdown of federal services.

It has also been unable to pass legislation to increase the US debt ceiling, something which could potentially cause the first US default in history.

The IMF said that its forecasts assumed the shutdown would be brief, that extra public spending would be agreed and that the debt ceiling would be raised.

"There is uncertainty on all three accounts," it added.

"While the damage to the US economy from a short shutdown is likely to be limited, a longer shutdown could be quite harmful. And, even more importantly, a failure to promptly raise the debt ceiling, leading to a US selective default, could seriously damage the global economy."

An added worry is that across the world, the recovery could be more tepid than normal.

Long-term average growth across the world is usually close to 4%. However, the IMF said that in the medium term it might only be realistic to expect something closer to 3%, given the serious impact of the Fed and other central banks reversing their quantitative easing programmes.

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