IMF downbeat on UK 2010 outlook

By David Milliken

LONDON (Reuters) - The economy will shrink sharply in 2009 before edging into growth in 2010, and the government should plan to reduce borrowing when recovery comes, the International Monetary Fund said on Thursday.

In its annual review of the British economy, the IMF said the country had succeeded in averting a financial meltdown, but now needed to focus on ensuring public borrowing did not get out of control during its deepest recession in decades.

"Market conditions so far suggest the UK is getting the benefit of the doubt. But this benefit of the doubt will not last forever," said Ajai Chopra, the IMF's mission chief for Britain.

The IMF forecast Britain's economy will shrink 4.2 percent this year before recovering to grow 0.2 percent in 2010, unchanged from forecasts released earlier this month.

"The economic outlook is highly uncertain. Recent indicators suggest that economic activity has begun to stabilise. However, the recovery is likely to be slow and subdued as banks and households go through a difficult balance sheet adjustment," the IMF said.

The global economic watchdog's forecasts are gloomier than government projections of 3.25 percent to 3.75 percent contraction in 2009 followed by 1.0 percent to 1.5 percent growth in 2010, and it identified soaring government debt as a major vulnerability.

Borrowing was likely to be equivalent to around 13 percent of GDP in 2009 and 2010, with total debt approaching 100 percent of GDP over the next five years.

"The success of the current policy package depends on continued trust in the sustainability of the fiscal position. A strong commitment to reverse the sharp deterioration of the public finances once the economic recovery has been established ... will be essential," the IMF said.