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IMF warns UK of risks to rosy economic future

The International Monetary Fund (IMF) has warned the U.K. of a series of risk that could hit the country's strong economic performance.

In the latest report on the U.K. published on Friday, the IMF praised the U.K's recent economic record..

"The U.K.'s recent economic performance has been strong, and considerable progress has been achieved in addressing underlying vulnerabilities. Growth has exceeded that of the other major advanced economies, the unemployment rate has fallen substantially, employment has reached an historic high, the fiscal deficit has been reduced, and financial sector resilience has increased," the IMF said.

The U.K. economy remains robust and is one of the developed world's leading economies. The IMF said in its World Economic outlook report in October that it expected the U.K. to grow a respectable 2.5 percent in 2015 and 2.2 percent in 2016. Unemployment figures for the July-September period showed the jobless rate fell to 5.3 percent, the lowest rate since the March to May 2008.


An aerial view of the Shard on June 28, 2012 in London, England.
Greg Fonne/Getty Images
An aerial view of the Shard on June 28, 2012 in London, England.

The IMF said Friday that "steady growth looks likely to continue over the next few years, and inflation (at -0.1 percent in October from a year ago although core inflation, which strips out volatile fuel and food prices, rose to 1.1 percent) should gradually return to target."

Read MoreUK unemployment falls to lowest since 2008

With the economy running near capacity, the IMF said growth should be matched by steady increases in employment.

With all the good news out of the way, the IMF – which has had a bit of a thorny relationship with U.K.'s Chancellor George Osborne, disagreeing with his austerity drive in the past – issued some stark warnings on risks to the outlook.

Read More UK economy job done? No way: Osborne

"There are, however, a number of risks to this broadly positive outlook" with domestic and external imbalances persisting and there were risks of various "shocks". Here are the U.K.'s flashpoints:

Household debt

"House price growth has eased somewhat over the past year, but remains high. The absence of an associated boom in net mortgage lending helps contain financial risks associated with high house prices" the IMF said.

However, it noted that while the share of households borrowing at high loan-to-income multiples has come down, the household debt-to-income ratio has stabilized at a high level despite steady output growth, "leaving some households vulnerable to income and interest rate shocks."

Current account deficit

The current account deficit is similarly not a result of funding a household credit boom, but nonetheless is strikingly large, the IMF noted. "Notwithstanding a flexible exchange rate and independent monetary policy, confidence shocks could reduce external capital flows into the U.K., which could adversely affect growth."

Fiscal deficit

The 2014/15 fiscal deficit stood at nearly 5 percent of gross domestic product (GDP), with general government gross debt reaching 87 percent of GDP, despite steady progress in reducing fiscal imbalances. While the U.K. continues to benefit from record low interest rates, "maintaining deficits and debts at these levels would constrain the space to respond proactively to future large negative growth shocks," the IMF noted.

Lastly, the IMF said there were "other uncertainties that may affect the outlook," such as a planned referendum on EU membership which "could weigh on the outlook" and a presumed recovery in productivity growth which, it said, could fail to materialize.

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt. Follow CNBC International on Twitter and Facebook.