Economic recovery under way, says IMF

In its annual health check on the British economy, the IMF described Chancellor George Osborne's plans to reduce the UK deficit as "credible" and "essential"

It predicted economic growth of two per cent in 2011, which is lower than its previous estimate of 2.1 per cent, and predicted the rate of inflation would fall back to its two per cent target by early 2012.

Its endorsement of the Government's plans to tackle the UK's creaking public finances comes less than a month before the Chancellor sets out the Comprehensive Spending Review revealing the full extent of the Government's austerity measures.

Its statement said: "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."

A spokesman for the Treasury said: "Last year the IMF said Government borrowing was a risk to the recovery. This year the IMF's verdict is that the economy is on the mend and that the Government's deficit reduction plan is essential and will ensure the sustainability of the public finances."

The IMF said policymakers at the Bank of England would need to be "nimble" if risks to the economic recovery emerged. While the low interest rate and recovering global demand could see faster-than-expected growth in the UK, low consumer confidence, strained household and bank finances, and signs of renewed housing market weakness all pose a threat.

Chancellor George Osborne said the report was a "very welcome endorsement" of the Government's budget strategy.