IMF warns on UK house prices

AN 'abrupt adjustment' in house prices is the gravest threat to Britain's economy, the International Monetary Fund has warned.

The caution from its highly respected experts is unusually strong. It came on the eve of Gordon Brown's departure to Washington for meetings of the IMF and World Bank.

The Chancellor is expected to tell them that soaring oil prices, which hit $50 a barrel this week, threaten recovery through the Western and developing world.

The IMF's World Economic Outlook report says that despite signs of cooling, house prices in the UK are out of touch with underlying conditions in the economy.

They may be 20% higher than is justified. In a rare direct address to consumers, it urges buyers to 'exercise particular caution at this present juncture'.

It says that while Britain's economy is robust, it is particularly vulnerable to a house price fall, because many buyers have adjustable rate mortgages. The Bank of England has raised its base rate five times since November 2003 to 4.75%.

In its central forecast for the current year, the IMF agrees with the Chancellor, projecting overall growth for Britain of 3.4%.

But it is far more gloomy than Brown after that, predicting the economy will slow to 2.5% next year - well below the 3% to 3.5% forecast in the Chancellor's March Budget.

The IMF is also critical of the Treasury's approach to the public finances.

It expects higher growth this year will result in some improvement in public borrowing, projected by the City to reach £33bn. But it also calls for 'fiscal consolidation' - IMF language for spending cuts or tax increases - in 2005, when a General Election is widely expected.

Such measures will be necessary to avoid the embarrassment of breaching Brown's 'golden rule' which allows for borrowing only for investment over the economic cycle, it argues.

The Treasury dismissed the criticisms, saying the Chancellor's forecasting had been consistently better than the Fund's.

The IMF also expresses fears that Britain's economy is operating close to capacity, risking higher inflation.

Growing strains in the economy can be seen in the rise in private sector wages this year as well as a sharp deterioration in Britain's trade balance as imports were sucked in, it says.

Trade figures published yesterday showed that the nation imported £6.4bn more goods in the second quarter than it exported.

On the world economy, the IMF said growth would reach 5%, but noted that momentum is slowing in the US, Japan and China.

It said interest rates throughout the West would have to rise, and called on major industrial countries to begin cutting back bloated budget deficits.

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