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IMF warning over 'bumpy and uneven' UK recovery

Britain will have a "bumpy and uneven recovery" and ministers must be ready to change economic policy if growth and inflation do not develop as they hope, the International Monetary Fund has warned.

In an assessment of the state of the UK economy, the IMF gave its backing to the Government's policy of "fiscal consolidation" to cut the deficit through tax hikes and spending cuts, backed by low interest rates set by the Bank of England.

But the international finance body warned that the growth outlook was "subject to considerable uncertainties", and predicted a GDP hike of just 1.5% this year and 2.5% in 2012 - slightly below the 1.7% in 2011 and 2.5% for 2012 forecast by the Office for Budget Responsibility at the time of George Osborne's budget in March.

Weaker-than-expected growth might require the Government to adopt "looser macroeconomic policies" such as tax cuts to stimulate demand, while the Bank launches a fresh round of quantitative easing - effectively printing money - said the IMF.

However, the Bank must be ready to intervene to dampen demand by increasing interest rates from their record low of 0.5% if there are signs inflation is taking off, said the report.

Inflation can be expected to remain "well above 4%" for the remainder of 2011 before declining to near the Government's 2% target by the end of next year, it added.

The directors of the IMF "consider the current mix of accommodative monetary and tight fiscal policy to be appropriate", said today's report.

But it added: "Directors noted that the growth outlook is subject to considerable uncertainties. They agreed that policies may need to adjust in the event of a change in macroeconomic conditions.

"In particular, if growth and inflation surprise on the upside, monetary tightening would need to accelerate.

"Conversely, mounting evidence that weak demand is likely to cause the economy to stall and enter a period of prolonged low growth would call for looser macroeconomic policies."

The deputy director of the IMF's European Department Ajai Chopra said that the most likely scenario for the UK economy is a gradual recovery, with continued "headwinds" due to the sluggish housing market, Government belt-tightening and businesses and individuals paying off their debts.

But, writing in the Daily Telegraph, Mr Chopra said that another possible scenario could see "a prolonged period of weak growth, high unemployment, and subdued inflation".

"Currently, we don't expect this scenario to happen," he said. "But if such a scenario appears to be in prospect, we recommend responding quickly with some combination of further quantitative easing by the Bank of England and temporary tax cuts."

Mr Chopra wrote: "The IMF is expecting a bumpy and uneven recovery in the UK... Over the medium term, we expect growth to accelerate gradually to about 2.5%.

"But volatile commodity prices, the uncertain magnitude of fiscal headwinds, and problems in the eurozone have added a lot of uncertainty to this outlook. It's not easy to steer a clear course in such circumstances."