The International Monetary Fund has upgraded its forecast for Britain’s economy, amid “welcome signs” that the pace of economic activity is finally beginning to pick up after the global crash.
The world financial watchdog said it now expected the UK to see growth of 1.4% this year rising to 1.9% in 2014, compared to its last forecast in July of 0.9% growth in 2013 and 1.5% next year.
But in its latest World Economic Outlook, the IMF said that it would still take years before Britain’s economy recovers fully from the effects of the collapse of 2008.
It suggested the Government should now bring forward public investment projects to offset the squeeze on near-term Whitehall spending.
“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,” it said.
Growth is expected to be about 1.5% in 2013 and 2% in 2014, slowly returning to trend in the medium term, but output levels will remain below potential for many years.”
The IMF said that with interest rates remaining low, the Government could afford to do more to boost growth through long-term investment projects while sticking to its plan for tackling the deficit.
“In an environment of still low interest rates and under-utilisation 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,” it said.
While it welcomed the system of “forward guidance” on interest rates adopted by the Bank of England under governor Mark Carney, the IMF said “greater co-ordination” was needed across the newly-established system of regulatory bodies, including the Bank’s financial policy committee.
It is essential that regulators are “adequately resourced and operationally independent”.
The IMF also highlighted the continuing problems in the eurozone, where economic activity is forecast to shrink by around 0.5% in 2013 after a similar contraction the previous year.
“Risks have become more balanced than six months ago, but still remain tilted to the downside,” it said.
“Amid a fragile recovery, limited policy space, and substantial slack, the region could be hit by further domestic or external shocks.”
The Treasury said the upgrade in the UK’s growth forecast - the biggest for any of the G7 nations - showed the Government’s economic strategy was working.
“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,” a spokesman said.
“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.”