By David Milliken and Sarah Young
LONDON (Reuters) -The International Monetary Fund no longer expects a recession in Britain this year, it said on Tuesday, praising steps taken by the government to stabilise the economy and fight inflation and warning against pre-election tax cuts.
The IMF said gross domestic product now looks set to grow by 0.4% in 2023 rather than contracting by 0.3% as it had predicted in April. The earlier forecast was the weakest for any major economy this year but the new growth projection would see Britain edge ahead of some rich world peers including Germany.
While the IMF warned the outlook remains subdued, it said Prime Minister Rishi Sunak's government was on the right track, in contrast to its concerns about the direction of economic policy under former premier Liz Truss.
"The UK authorities have taken decisive and responsible steps in recent months," IMF Managing Director Kristalina Georgieva told a press conference on Tuesday.
"What we see is that the government is prioritising, and rightly so, the fight against inflation."
Sunak and finance minister Jeremy Hunt took over in October, after Truss's brief term sowed chaos in financial markets.
The IMF said Britain's improved outlook reflected the unexpected resilience of demand, helped in part by faster than usual pay growth, higher government spending and improved business confidence.
The fall in energy costs after sharp rises last year and the normalisation of global supply chains also helped, it said.
Georgieva said the current government's prioritisation of fiscal prudence was admirable, and warned Hunt against allowing budget policy to be overtaken by political priorities.
"Of course it is attractive to look into ways in which the tax burden is lighter, to inject more investment opportunity, but only when it is affordable," Georgieva said. "And at this point of time, neither is it affordable, nor is it desirable."
With the opposition Labour party far ahead in opinion polls, Hunt is likely to come under increasing pressure from within his Conservative Party to cut taxes in time for an election expected in late 2024.
FALLING INFLATION
British inflation is likely to fall to around 5% by the end of this year from more than 10% in March, and should return to its 2% target by the middle of 2025, the IMF said - broadly in line with forecasts from the Bank of England earlier this month.
It said the economy would grow by 1% in 2024 and 2% in the following two years, before returning to a long-run growth rate of around 1.5%.
Britain's growth potential could be improved by measures to tackle the impact of long-term illness on the labour force, and by reducing policy and regulatory uncertainty which harms business investment, the IMF added.
A recently revised agreement with the European Union on post-Brexit trade involving Northern Ireland and a "more measured" approach to scrapping EU law should encourage investment, it said.
The IMF said further persistence in inflation and accompanying unsustainable increases in wages were the biggest near-term threats to Britain's economic outlook and that the BoE should ensure monetary policy remained tight.
"This said, elevated uncertainty about the macroeconomic outlook and inflation persistence merits continuous review of the pace and magnitude of monetary tightening," the IMF added.
The BoE has raised borrowing costs at 12 consecutive meetings, taking rates to 4.5% this month, and financial markets see them peaking at 5% later this year.