UK economy on the mend, says IMF, endorsing Coalition's austerity plan

The International Monetary Fund today said the UK economy was on the mend after its deepest postwar recession and praised the coalition government for its hardline approach to cutting the budget deficit.

In its annual health check of Britain, the Washington-based fund said George Osborne's planned cuts in public spending were unlikely to derail growth. "The UK economy is on the mend. Economic recovery is underway, unemployment has stabilized, and financial sector health has improved." 

In a strong endorsement of the chancellor's plans to slash the UK's record peacetime deficit, the IMF added: "The government's strong and credible multi-year fiscal deficit reduction plan is essential to ensure debt sustainability. The plan greatly reduces the risk of a costly loss of confidence in public finances and supports a balanced recovery. Fiscal tightening will dampen short-term growth but not stop it as other sectors of the economy emerge as drivers of recovery, supported by continued monetary stimulus."

After assessing the state of the UK, the IMF team said economic recovery would proceed at a moderate pace, with growth of 2% in 2011 rising to 2.5% in the medium term. It said the Bank of England would need to be "nimble" if the impact on growth of the budget cuts proved to be more severe than expected. The IMF saw no reason why interest rates needed to be raised from their current emergency level of 0.5%.

The report warned the government against getting cold feet about reform of banks. "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."

Although the IMF saw no evidence of a double-dip recession, it stressed that it would take time for voters to feel the impact. "Households are likely to remain thriftier than before the crisis but will be in a position to gradually raise their consumption as labour markets recover."

[So unemployment has "stabilized", has it?  The cuts haven't even started yet. Come back in three months - Ed]