The UK economy is on the mend and "recovery is under way", a report by the International Monetary Fund (IMF) said today.
In its annual healthcheck on the British economy, the IMF backed the coalition Government's deficit-busting austerity measures, calling Chancellor George Osborne's plans "credible" and "essential".
The body also predicted economic growth of 2% in 2011, although this was lower than its previous estimate of 2.1%, and predicted the rate of inflation would fall back to its 2% target by early 2012.
The IMF's endorsement of the Government's plans to tackle the UK's creaking public finances comes less than a month before the Chancellor sets out his comprehensive spending review.
The IMF 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, tackling the highest deficit in the G7."
The IMF said policymakers at the Bank of England would need to be "nimble" if risks to the economic recovery emerged.
The Bank is currently holding interest rates at an all-time low of 0.5%, and has pumped £200 billion into the economy through its quantitative easing programme.
In its meeting earlier this month the Monetary Policy Committee said it was leaning towards further emergency measures to prop up the economic recovery, and was poised to act.
Chancellor George Osborne said that the IMF's report was a "very welcome endorsement" of the Government's budget strategy.
"They have made it pretty clear that the deficit reduction plan that we have set out is essential for bringing about sustainability in our budget," he told the BBC.
"It reminds us that if we divert from the course the new Government has set out then we really will be heading back into a disastrous period of economic instability for Britain."
Looking ahead, the IMF said households in the UK are likely to remain "thriftier" than before the financial crisis but consumption levels will rise as the labour market improves.
While the low interest rate and recovering global demand could see faster-than-expected growth in the UK, the IMF said there were still sizeable risks to the recovery.
Low consumer confidence, strained household and bank finances, and signs of renewed housing market weakness all pose a threat, it added.
Shadow business secretary Pat McFadden said: "The IMF are clear about the 'sizeable' risks to growth of the coalition's approach.
"And with Ireland falling back into recession only last week, we've seen what happens when a gamble like this goes wrong."