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IMF Deals Blow to UK's Growth Optimism

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The U.K.'s hopes of a meaningful economic recovery in the near-term were dealt another blow by the International Monetary Fund (IMF) on Tuesday when it singled out the country's fiscal plan for criticism.

The IMF predicted the U.K. economy would grow by 0.7 percent this year and by 1.5 percent in 2014 – cutting both forecasts by 0.3 percentage points. The combined downgrade was larger than for any other advanced economy. The IMF also criticized the government's austerity program.

(Read More: IMF: There Is No Silver Bullet for Debt Concerns)

"Greater near-term flexibility in the path of fiscal adjustment should be considered in the light of lackluster private demand," it said on Tuesday.

"Domestic rebalancing from the public to the private sector is being held back by deleveraging, tight credit conditions, and economic uncertainty, while declining productivity growth and high unit labor costs are holding back much needed external rebalancing," the report added.

In recent months strong data had raised hopes the economy would post improved, albeit still sluggish, growth. Fears of a triple-dip recession have abated after strong data from the services sector in March and rising retail and consumer confidence.

(Read More: No Triple-Dip: UK Economy Fears Ease)

The move is also a blow for the U.K.'s Finance Minister George Osborne, who has stuck to his austerity plans, despite admitting that his debt reduction goals won't be achieved within the original timeframe.

In his budget statement in March, Osborne also forced to downgrade his growth outlook for the U.K. to 0.6 percent this year - half the rate forecast by the Office for Budget Responsibility in December.

Osborne also revised forecasts for the U.K.'s national debt, saying it would rise to 85 percent of GDP in 2013 and would not start coming down until 2017/18.

Richard Driver, an analyst at forex firm Caxton FX, said in a note on Wednesday that the IMF's remarks were not surprising.

"I am surprised yesterday's IMF comments took so long to emerge to be honest; flat-lining growth and a lack of progress on the U.K. debt profile demands a fresh approach," Driver wrote.

In response to the IMF's forecast, the Treasury said on Tuesday that the U.K. was still forecast to grow by more than Germany in 2013, which is expected to expand by 0.6 percent this year.

-By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt

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