The International Monetary Fund raised its growth forecast for the U.K. economy this year, despite lowering its expectations for Germany, France, Italy and the euro zone.The U.K. upgrade follows similar moves by economists at a number of banks in response to a series of data releases and surveys over recent months that have suggested the economy is in recovery, having grown 0.3% in the first three months of the year. However, a decline in factory output and an increase in the trade deficit during May that were disclosed earlier Tuesday served as a reminder that the recovery is still fragile and has yet to spread to all parts of the economy.The IMF said it expects the U.K. economy to expand 0.9% this year, up from a prediction of 0.6% in April. The forecast is still below the 1.0% rate the IMF projected in January, and the fund left its forecast for 2014 unchanged at 1.5%, a modest rate of expansion for an economy coming out of a long period of contraction and then stagnation. The fund's gloomier outlook for the euro zone will also be a worry for U.K. policy makers, since the currency area is a major destination for British exports. "The IMF has confirmed that the U.K. economy is moving from rescue to recovery, revising up its growth forecast for this year," a spokesman for the U.K. Treasury said. "But the IMF again warns of the continued risks to the global economy, showing that the recovery cannot be taken for granted." Figures released by the Office for National Statistics showed growth in industrial production ground to a halt in May despite a sharp pickup in oil and gas extraction, which was offset by a 0.8% fall in manufacturing output from the previous month. And the latest global goods trade deficit widened to £8.5 billion ($12.71 billion) in May from April's £8.4 billion deficit. Despite the fall in manufacturing output, the National Institute of Economic and Social Research Tuesday said its modelling shows the economy grew 0.6% in the three months to the end of June.NIESR's estimate for GDP growth in the first quarter was 0.1%, slightly weaker than the official reading of 0.3%. The last time the U.K. economy expanded as much as 0.6% was in the third quarter of 2012 when it grew 0.7%. But that was distorted by the London Olympics, which gave the economy a significant one-off boost. Stripping out the Olympics, the last time the economy achieved quarterly growth of 0.6% was in the third quarter of 2011. In May, the BOE forecast that gross domestic product would increase 0.5% in the second quarter, and a pickup in activity still seems likely despite the fall in factory output. But in a statement last week designed to dampen expectations that it would tighten policy next year, the BOE stressed that the recovery will be weak by historic standards. The unexpected decline in factory output may be linked to a broader trend in Europe, rather than a reflection of particular difficulties within the U.K. Figures released Monday showed surprisingly large declines in industrial output in Germany, Sweden, the Czech Republic and Turkey.A trio of surveys released earlier Tuesday showed renewed vigour in the housing market, retail sales and business confidence. The Royal Institution of Chartered Surveyors said its house prices balance rose to a 3.5-year high of plus-21 in June from plus-5 in May, while the British Retail Consortium's monthly survey showed total retail sales volumes grew 2.9% on the year in June. Same-store sales—which only include stores in business for at least a year—were 1.4% higher. A quarterly survey from Deloitte showed a similarly improved mood among chief financial officers. Forty-five percent of the 135 CFOs who participated say now is a good time to take a risk, the highest level recorded in the six-year history of the survey. More are inclined to spend on staffing and investment, while overall business optimistic increased for a fourth straight quarter. Both the government and the Bank of England had hoped that the economy would rebalance toward manufacturing, investment and exports, and away from the combination of rapidly expanding financial services activity, and high levels of consumer and government spending that fuelled rapid rates of growth in the years running up to 2007. "The broader picture for the rebalancing of the economy towards exports driven growth—and away from domestic consumption—remains disappointing," said Blerina Uruci, an economist at Barclays Bank.
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