The British government should stick to its guns and continue with its deficit-reduction strategy despite weaker than anticipated economic growth, the International Monetary Fund said Monday.
Though the IMF was more cautious about the British economy than it was at the time of its last review last September, it effectively endorsed the government's strategy to get a grip on the public finances, which had been blown off course during the global financial crisis.
It said sorting out the public finances "remains essential to achieving a more sustainable budgetary position."
The IMF said unexpected low growth and high inflation rates are largely due to temporary factors, but that the government will have to be flexible in its strategy should "significant" risks to inflation, growth and unemployment materialize.
John Lipsky, the IMF's acting managing director following last month's resignation of Dominique Strauss-Kahn, told a press briefing at the Treasury that uncertainties over the forecasts remained "high," partly related to the recent spike in energy and commodity prices. As a result, economic growth in Britain, as elsewhere in the world, had recently come in below forecast, he added.
"Naturally, these deviations raise the question of whether it is time to adjust the macro-economic strategy," Lipsky said. "According to the IMF staff analysis, the answer is no. We expect the deviations from economic forecasts to be largely temporary."
Though Lipsky said the economic recovery was likely to resume in 2011, albeit at a moderate pace, he noted that unemployment remained "unacceptably high" even though it appeared to have stabilized recently.
Though Britain's economy recorded no growth over the previous two quarters, the IMF said a recovery of private investment was likely to support annual growth of 1.5 percent this year, increasing to 2.5 percent over the medium term.
That was less optimistic than the IMF team reported in September, when it expected real GDP growth of 2 percent this year. It had also forecast that inflation would fall back to 2 percent by early 2012.
Lipsky insisted that sorting out the public finances was necessary for Britain's long-run growth prospects in the year to come.
The IMF report chimed with Treasury chief George Osborne's statement earlier Monday that he had no plan to change course, though he also stressed that there was scope for flexibility if required.
"My plan provides flexibility but also stability and confidence," Osborne said in an interview with British Broadcasting Corp. radio. "It is flexible because it was very specifically designed to be cyclical."
While growth has come in below forecasts, inflation over the past few months has been higher than anticipated.
The IMF said it expects annual rate of consumer price inflation to stay above 4 percent, double the official target, for the rest of the year, and not fall back to 2 percent until late next year.
That forecast is in line with the Bank of England's predictions. In its quarterly inflation report in May, the central bank predicted that inflation could hit 5 percent before falling back toward target next year.
On Monday, the government also signaled some concern that its policies could provoke a higher level of strike activity.
Business Secretary Vince Cable told a labor conference that there were no current plans to restrict the right to strike, but he said that could change if large numbers of public employees join a call for a day of protest later this month.
"Should the position change, and should strikes impose serious damage to our economic and social fabric, the pressure on us to act would ratchet up," Cable said. "That is something which both you, and certainly I, would wish to avoid."
Mark Serwotka, leader of the Public and Commercial Services union, said the government was hurting workers by cutting public sector jobs and cutting back or eliminating public services.
"Public sector workers are currently facing unprecedented ideological attacks on their jobs, pensions, pay and conditions which will throw the economy into further recession," Serwotka said.