IMF praises UK economy

19 December 2005

The British economy has done remarkably well in the face of soaring energy prices and a slowing housing market, the International Monetary Fund said on Monday.

In its annual "Article IV" healthcheck of the world's fourth largest economy, the IMF praised UK policymakers for the current stability and predicted economic growth would pick up to 2.25 percent next year and 2.75 percent in 2007.

The report will be welcome reading for Chancellor Gordon Brown whose handling of the economy has come under fire in recent days after he was forced to slash his growth forecast for 2005 earlier this month. "Macroeconomic stability in the United Kingdom remains remarkable," the report said. "This impressive record owes much to good macroeconomic, financial and structural policies, underpinned by sound policy frameworks and supported by a generally favourable external environment."

But while the IMF welcomed Brown's latest plans to rein in the budget deficit, it said that reaching the government's forecast of 1.5 percent of GDP would require extra revenue-raising measures or higher receipts. It also said that while Brown's fiscal rules have played an important role in keeping deficits in check, his redefinition of the economic cycle had reduced their effectiveness. "The adjustments in the definition of the cycle have proved an unhelpful distraction from the more important considerations of what a sustainable fiscal policy is," the IMF said.

Brown's golden rule on the public finances states that the government only borrows to invest over the economic cycle. But Brown has come under a lot of criticism after he changed the start date of the economic cycle in the summer which made it easier for him to not break the rule. He then extended the duration of the cycle in his pre-budget report this month. On monetary policy, the IMF said the outlook was "finely balanced" but the priority should be to ensure that high oil prices did not cause second round inflationary effects. The IMF also said that while house prices still looked highly valued, the chances of a crash had lessened.