IMF sees UK economy growing 2.5 percent in 2006

The British economy is expected to grow by 2.5 percent this year and 2.75 percent in 2007, the International Monetary Fund said on Friday.
In a report following its "Article IV" health check of the British economy conducted in December, the IMF praised British policymakers for a strong and steady macroeconomic performance over the past decade.
While growth was expected to pick up and inflation stabilise around target, the housing market, energy prices and the effects of immigration posed uncertainties for the outlook, the fund said.
The IMF said it agreed with the Bank of England's current policy stance of interest rates at 4.5 percent and advocated that upcoming rate decisions be focused on averting second round effects on wages following a spike in energy prices.
It said house prices were probably still overvalued and recent data suggested the property market was picking up, something the BoE should watch out for.
"The Bank of England will have to remain vigilant on the impact of any reacceleration of house prices on private consumption," said James Morrison, division chief of the IMF's UK department in Washington.
But the IMF differed with the Treasury on the likely size of the output gap. Whereas the Treasury thinks it is sizeable, the IMF reckoned it is modest.
"On the basis of the same policy assumptions, the Treasury projects a deficit of 1.5 percent of GDP in the medium term while (IMF) staff project 2 percent of GDP - still adequate to stabilise debt at about 40 percent of GDP," the report said.
"The main difference between the projections relates to the revenue gain from closing the output gap."
IMF staff and British officials agreed significant immigration had likely helped alleviate specific skill shortages and thus acted to reduce inflationary pressures but the magnitude and persistence of supply effects were hard to judge.
The financial system was generally healthy, the IMF said but people were not putting enough aside for retirement.
"Evidence that a portion of the population is not saving enough for retirement is raising concerns about the political sustainability of the relatively frugal state pension system," the report said.