IMF backs coalition spending cuts

The IMF said the health of the banking sector had improved in the past 12 months

27 September 2010 Last updated at 15:01 GMT
 

   The International Monetary Fund (IMF) has said the UK economy is "on the mend" and has backed the coalition government's plans to cut spending.
The IMF described the deficit reduction plan as "essential" in supporting the UK's debt position, and said it "supported a balanced recovery".
The body also said that the UK economy would continue to recover at a moderate pace while the cuts were implemented.
The IMF predicted growth of 2% in 2011, rising to 2.5% in the medium term.
"Economic recovery is underway, unemployment has stabilised and financial sector health has improved," the IMF said.
    It acknowledged that the spending cuts designed to reduce the government's budget deficit would hit growth, but it said that the economy would continue to recover.
"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."
It also said companies were starting to increase investment as "the demand outlook strengthens".
Consumers, it added, would remain "thriftier" than they were before the financial crisis, but would be in a position to "gradually raise their consumption as labour markets recover".
'Downside risks' The body also forecast that inflation would fall back below the target rate of 2% by early 2012.
The rise in VAT to 20% in January would ensure that inflation remains above target next year, it said.
Despite the upbeat assessment of the UK economy and the government's plans to cut the deficit, the IMF warned that "downside risks are also sizeable".
These risks, it said, included continued fragile confidence, weakness in the housing market and a greater impact than expected from spending cuts.

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