Britain will grow faster this year than previously expected according to the International Monetary Fund (IMF), in the first major upgrade of the UK's economic outlook for almost three years.
The economy will expand by 0.9% compared with the previous forecast of 0.6%, the IMF said in its quarterly global financial health check. But a lacklustre performance by developing countries, a prolonged eurozone recession and US spending cuts will hamper plans to increase exports and restrict Britain's GDP growth in 2014 to 1.5%, it added.
George Osborne will be cheered by the more upbeat outlook after suffering two years of brickbats from the IMF, which has lectured the government on taking a more expansionary stance and delaying public spending cuts. Yet growth of 1.5% next year could still be too weak to improve employment or spark a revival in manufacturing investment, which the chancellor believes is necessary for a more sustainable recovery.
A Treasury spokeswoman said: "The IMF has confirmed that the UK economy is moving from rescue to recovery, revising up its growth forecast for this year. But the IMF again warns of the continued risks to the global economy, showing that the recovery cannot be taken for granted."
IMF official Thomas Helbling said the main reason for the improved outlook was the data in the first quarter showing higher domestic demand.
"It is a small revision, nothing exceptional. The recovery is still weak and policyholders should still take measures to secure stronger growth," he said.
While the IMF has become more optimistic about the UK, it has cut its forecasts of global growth from 3.3% to 3.1% this year and from 4% to 3.8% for 2014. It cites weak demand and slower growth in key emerging market economies, and a longer than expected recession in the eurozone.
The Washington-based lender of last resort, which has supported rescue bailouts of Greece, Portugal and Ireland, took eurozone leaders to task, urging them to make strides to a closer banking union to ease fears of further bank collapses.
It called on Brussels to walk the tightrope between cutting public expenditure to make bigger debt repayments on one hand and spurring growth with policies to boost business investment and consumer demand on the other. "Policies to reduce financial market fragmentation, support demand, and reform product and labour markets are also crucial for stronger growth and job creation," it said.
The IMF downgraded its forecast for the eurozone from a 0.4% contraction to 0.6% this year, and expects a return to growth in 2014 but at a measly 0.9%, even weaker than the 1% it had previously predicted.
After a period of nervous trading in financial markets, the IMF report said the global economy was vulnerable to new risks. Those risk are in addition to the threat posed by huge sovereign debts and the domino effect of a bank collapse that has undermined confidence in the wake of the 2008 financial crash, it added.
In particular, the threat to developing countries from weaker demand and a collapse in the value of their currency has become greater, it said. Political instability in Egypt and Syria has clouded the outlook for the Middle East and north Africa, while even the most developed parts of southern and western Africa have struggled to maintain previously strong growth.
Referring to the Bric countries of Brazil, Russia, India and China, it said: "The outlook for many commodity exporters (including those among the Brics) has also deteriorated due to lower commodity prices.
"Growth in sub-Saharan Africa will be weaker, as some of its largest economies (Nigeria, South Africa) struggle with domestic problems and weaker external demand. Growth in some economies in the Middle East and north Africa remains weak because of difficult political and economic transitions."
The IMF's view that the UK recovery was weak was leapt on by Labour's shadow chancellor, Ed Balls, who pointed out that the revised figure was still lower than the IMF's forecast at the start of this year.
"And the IMF's advice to George Osborne remains unchanged. As they said just a few weeks ago, Britain is a long way from a strong and sustained recovery and so the government should bring forward infrastructure investment right now to create jobs and growth.
The TUC leader, Frances O'Grady, said: "Raising growth forecasts from rubbish to not quite so rubbish hardly constitutes a strong recovery. The UK is still on course for the slowest recovery in over a century, and growth this year will still be well below the OBR's initial forecast of 2.9%."
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