The UK is set to be the world’s fastest-growing major advanced economy this year according to a sharply-upgraded forecast from the International Monetary Fund (IMF).
Gross domestic product (GDP) is expected to increase by 2.9%, up from an earlier 2.4% prediction by the global body.
It puts Britain ahead of the US on 2.8%, Germany on 1.7% and Canada at 2.3%. The new figures also upgrade UK growth for next year though they still predict it will be slower than this year.
The latest World Economic Outlook also gives its backing to policies pursued by Chancellor George Osborne and Bank of England governor Mark Carney.
But it sounds a warning over the risk posed by surging house prices and the threat of deflation in the eurozone.
The IMF predicts world growth will accelerate to 3.6% this year and 3.9% in 2015 though it warns that the global recovery is still “fragile” with risks including turbulence from emerging market economies.
But chief economist Olivier Blanchard said: “Put simply, the recovery is strengthening. The various brakes that hampered growth are being slowly loosened.”
Tax and spending tightening was slowing and investors are becoming less worried about debt, while banks are becoming stronger.
Mr Blanchard said while the global economy was “far short of a full recovery”, normal monetary policy – meaning a withdrawal from stimulus measures such as ultra-low interest rates and money printing – was now on the agenda.
The report warned that policymakers must “avoid a premature withdrawal of monetary accommodation” – supporting Mr Carney’s caution about any immediate increase in interest rates.
It also explicitly called on the European Central Bank to take deeper stimulus measures – which it has so far avoided – to try to prevent a deflationary spiral that would put pressure on borrowers and weaken demand and output.
The report said UK growth had “rebounded more strongly than anticipated” though the recovery remained unbalanced, with business investments and exports remaining disappointing.
It said the Bank’s monetary policy – which has seen interest rates held at 0.5% for four years and £375 billion of quantitative easing pumped into the economy – should remain “accommodative”.
The IMF also backed the Bank’s decision to dump forward guidance linking interest rates to unemployment in favour of a link to a more opaque measure of the how far the economy is performing below capacity.
“Similarly, the Government’s efforts to raise capital spending while staying within the medium-term fiscal envelope should help bolster recovery and long-term growth,” the report said.
It also backed efforts to continue to restore financial sector soundness, but said the UK should “guard against any build-up of financial vulnerabilities, including from surging house prices”.
The IMF upgraded its forecast for UK growth in 2015 from 2.2% to 2.5%. But that will still represent a fall on 2014, while the US is expected to see growth accelerate to 3% next year.
A Treasury spokesman said the upgraded forecast was “further evidence that the Government’s long-term economic plan is working”.
But shadow chancellor Ed Balls said millions were still worse off than when the Coalition came to power and had yet to feel the benefits of economic improvement.
He said: “The IMF is right to warn about an unbalanced recovery and it is concerning that growth is expected to slow down next year.
“The Government should also heed the IMF’s warnings about surging house prices by taking action to boost housing supply, as we have called for.”
Mr Osborne tweeted: “Good news from IMF: UK forecast to grow faster than any other western country + has biggest upgrade.”
But he added: “Job is not done. We need to do more to get our exports and investment going.”
The IMF forecast for growth this year is higher than the 2.7% predicted by the Office for Budget Responsibility. But it is lower than the Bank of England’s prediction of 3.4% growth.
It marks a sharp turnaround from a year ago when the IMF slashed its outlook for the UK and suggested that Mr Osborne should consider changing his austerity policies.
At that time, it cut its forecast for growth to 1.5%.
Mr Blanchard admitted that the IMF’s previous predictions were wrong.
He told reporters: “It is fair to say that our forecast was too pessimistic, and indeed growth has been much stronger than we had forecast.
“I think it has to be said that we are in the business of forecasting. Forecasting is an imperfect science and sometimes we over-estimate or under-forecast.”
He said the consumption-led nature of the UK recovery so far was a “rather unbalanced way to go” although investment now appeared to be increasing, giving a healthier growth picture.
Mr Blanchard defended his warnings last year about the outlook for Britain, saying it was his job to point out risks, adding: “Fortunately, most risks don’t materialise.”
Mr Osborne said: “It is good news that the IMF forecasts that Britain is to grow faster and has been upgraded by them by more than any other Western economy this year, and that record numbers of jobs are being created. It is proof that the economic plan is working.
“But we need to do more to get exports and investment going. That is what the Budget was all about and that is what I am doing in Brazil this week.
“It is clear today that the growth deniers in the Labour Party are intent on talking down the British economy – and that is the greatest risk to recovery.”