The International Monetary Fund raised its U.K. growth forecast by more than any other Group of Seven economy, strengthening Chancellor of the Exchequer George Osborne’s argument that his austerity plan is working.
The economy will grow 2.4 percent this year and 2.2 percent in 2015, the Washington-based lender said in its World Economic Outlook update published today. That compares with October growth forecasts of 1.9 percent and 2 percent, respectively.
“Activity in the United Kingdom has been buoyed by easier credit conditions and increased confidence,” the IMF said. Still, it warned that “economic slack will remain high.”
With the next general election due in May 2015, Osborne is seeking to convince voters that his Conservative Party is best placed to buoy Britain’s recovery. Recent polls give the opposition Labour Party a lead of about five percentage points.
The upgrade comes less than a year after Osborne clashed with the IMF over his economic plan. Last April, IMF Chief Economist Olivier Blanchard accused Osborne of “playing with fire” by pressing ahead with austerity, but the fund has since dropped its criticism. At the time, it was forecasting growth of 1.5 percent this year.
Government initiatives to spur credit, such as the Help to Buy and the Funding for Lending programs, are driving up house prices and boosting consumer spending. Osborne said in a speech this month that while Britain’s economy is “on the rise,” more budget cuts, particularly to welfare, are needed to keep borrowing costs low.
“Today’s report provides further evidence that the government’s long-term economic plan is working,” the Treasury said in an e-mailed statement. “But the job is not yet done and so the government will go on taking the difficult decisions necessary to deliver a sustainable recovery for all.”
According to the IMF, only the U.S., where growth is seen accelerating to 2.8 percent this year, will expand faster than the U.K. among G-7 economies. It estimated the U.K. economy advanced 1.7 percent last year, the most since 2010.
Its forecast of 2.4 percent growth this year matches that of the Office for Budget Responsibility, Osborne’s fiscal watchdog, and puts Britain on course for its best year since 2007. The E&Y Item Club, an economic research organization, raised its 2014 forecast yesterday to 2.7 percent.