John Lipsky from the IMF: ‘We expect the economic recovery to resume in 2011’
The International Monetary Fund (IMF) has concluded that no changes are needed to UK economic policy.
It said weak economic growth and rising inflation had been “unexpected”, but said they were “largely temporary”.
It pointed to rising commodity prices and the increase in VAT as temporary problems for inflation.
But its annual report warned that “there are significant risks to inflation, growth and unemployment”, which may need a policy response.
Policies suggested included expanding the Bank of England’s programme of asset purchases or having a temporary tax cut.
The IMF predicted that the UK economy would grow by 1.5% in 2011, down from its forecast of 1.7% in April and 2% in November 2010.
But it maintained its medium term forecast at 2.5%.
It predicted that inflation would remain above 4% for most of the year, but would return to its target rate of 2% by the end of 2012 as oil and food prices settle down.
“On the face of it, George Osborne comes out of the IMF’s annual health check better than the UK economy does. But there are some politically resonant caveats.”
At a news conference, IMF deputy director John Lipsky warned that, “uncertainty around the central forecasts remains high”, as it does in many other economies.
He added that “the unemployment rate remains unacceptably high but it seems to have stabilised”.
Chancellor George Osborne has made much of the support of organisations such as the IMF for his economic policies in the face of criticism of the pace of his deficit-cutting plans.
He will have been cheered by the IMF’s conclusion that his programme of spending cuts and tax rises remains “essential”.
The organisation also said that continuing low interest rates from the Bank of England would help companies and individuals pay off their debts as well as boosting investment and exports.
But there were some politically resonant caveats, according to the BBC’s economics editor Stephanie Flanders.
She said that last autumn, IMF staff thought the UK was “on the mend”. This latest, more sober assessment, was that the “post-crisis repair of the UK economy is underway”, she pointed out.
She added that in private there had been considerable concern at the IMF last year about the pace of the government’s deficit-reduction plans, but that in public the organisation had continued to endorse them.
The IMF also reported on the state of the UK’s financial services sector on the grounds that its health was important to the global economy.
“The financial sector definitely remains in the recovery phase,” Mr Lipsky said, adding that “further improvements in the quality of supervision will be required”.
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