“there are still “significant” risks to inflation, growth and unemployment in the UK.
In its latest assessment of the UK, the IMF said growth would be 1.5% this year – less than the government expects.
It backed the current austerity measures as “appropriate” to the present economic conditions.
However, it warned the government may need to react to new economic problems such as falling house prices.
The Office of Budget Responsibility had forecast 1.7% growth for 2011.
In its most likely “central scenario”, the international financial regulator and lender predicted inflation would fall from 5% in 2011 to 2% by the end of 2012, while growth would accelerate to 2.5%.
But the IMF warned that there was “substantial” uncertainty about this scenario.
The impact of spending cuts, higher prices for commodities such as oil, economic “turmoil” in the eurozone and falling house prices could throw the economy off course.
The report warned that the ratio of house prices compared to average earnings was still 30% above its historical average – meaning prices could fall, so limiting consumer spending.
It also estimated that the UK banking system had $178bn (£111bn) worth of loans to the three most troubled eurozone economies, Greece, the Irish Republic and Portugal – 25% of the total capital held by UK banks in the first quarter of 2011.
Continuing uncertainty about the ability of these countries to pay their debts therefore poses significant risks to the UK financial system.
If these risks materialised and growth stalled, then “significant loosening of macroeconomic policies” would be required, it said.
This could include tax cuts to boost spending.”