Tuesday 21 January 2014 8:19 pm

IMF backs down from UK criticism as forecast hiked

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THE INTERNATIONAL Monetary Fund (IMF) has flipped its position on the UK economy, confirming a large positive revision to its forecast for this year’s economic growth.

Having criticised chancellor George Osborne for “playing with fire” only eight months ago, IMF chief economist Olivier Blanchard said yesterday that the recent recovery is sustainable, explaining the IMF’s changed position: “What we were worried about six months ago, domestic spending was weak, consumption surprised us on the upside… many signals are good, this growth can continue for some time.”

Blanchard added that there was still considerable slack and room for improvement in the British economy, and that limp investment must improve in the year ahead.

As expected, the IMF hiked their 2014 growth forecast from 1.9 per cent in October to 2.4 per cent, the largest increase of any country. In April, the IMF only expected 1.5 per cent growth.

Growth in the euro area will be more muted, according to the IMF. An expansion of one per cent is expected, led by Germany.

The update also reveals more bullish sentiment about the Japanese economy, which is expected to grow by 1.7 per cent again this year, resisting the effect of a consumption tax hike tabled for this spring.

Russia is the only country to see its economic prospects significantly downgraded: the IMF now only projects two per cent growth, down from three per cent in October.

Blanchard also issued a monetary policy warning for the advanced economies now experiencing lower levels of inflation: “While there is nothing magical about the number zero, the lower the inflation rate, and a fortiori the larger the deflation rate, the more dangerous it is for the euro recovery. Deflation means higher real interest rates, higher public and private debt burdens, lower demand, lower growth, and further deflation pressure.”