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UK recovery 'slow and fragile'

Britain's economic recovery remains "slow and fragile" with output expected to stay well below-par for an extended period, the International Monetary Fund has concluded.

Officials from the Washington-based body also said that attempts to boost credit by injecting billions into the economy and maintaining interest rates at a historic low had been only partially successful.

Some were concerned that the continued slow pace of growth could undermine the Government's austerity policies, and the gloomy outlook comes just a week after the IMF delivered a boost to Chancellor George Osborne by increasing its growth forecast by 0.3% to 0.9% for 2013.

In the report, it said the trend of households paying off debts and poor demand from outside the UK meant that the improvement was limited. "Economic recovery in the UK continues to be slow and fragile, as domestic deleveraging pressures remain and external demand is weak," the IMF report said.

While economic activity was projected to recover, expansion would be weak "relative to the scale of underutilised resources", it added, leading to continued underperformance for some time to come.

"The output gap is projected to remain sizeable for an extended period, portending the risk that continued cyclical weakness will lead to a permanent loss in the economy's productive capacity," the report said.

It forecast inflation, which has crept up to 2.9%, declining in the medium term to its 2% target over the medium term. The picture of an anaemic recovery was dampened further by a warnings about risks from the eurozone as well as the reduction of debt levels in the public and private sector.

The IMF welcomed the "highly accommodative" use of monetary policy - which has seen interest rates held at 0.5%, £375 billion pumped into the economy and a Funding for Lending scheme aimed at easing borrowing for households and businesses - but said this had been only partially successful in improving credit.

"Mortgage rates have declined sharply and corporate bond and equity markets have recovered strongly. But bank lending, notably to sectors of the economy unable to post high-quality collateral, such as small and medium size enterprises (SMEs), remains very weak, as bank balance sheets remain impaired."

The report backed the Government's commitment to reducing the deficit but said that some of the IMF officials felt "slow growth could undermine the credibility of the adjustment effort". They called for more flexibility, including by bringing forward capital investment.

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