World emerges from recession, IMF claims

It's official: the recovery has begun – although recovery will be unpredictable and protracted, according to the International Monetary Fund's chief economist.

"The recovery has started," claims Olivier Blanchard in a paper to be published by the IMF on Wednesday. "Sustaining it will require delicate rebalancing acts, both within and across countries."

He warned that recovery would be slow and complicated: "The world is not in a run-of-the mill recession. The turnaround will not be simple. The crisis has left deep scars, which will affect both supply and demand for many years to come," he said.

His comments followed the news on Monday that Japan became the latest major economy to return to growth in the second quarter, following a recovery in German and French GDP. The British economy shrank by 0.8pc in the second quarter according to the Office for National Statistics (ONS). Adam Posen, who will join the Bank of England's Monetary Policy Committee next month, conceded yesterday that the UK, along with the US, Italy and Spain, was "lagging" in economic recovery. He added he was "surprised" by news of recovery in Germany and France.

Official figures released yesterday showed that inflation remained at 1.8pc in July for the second month in a row, close to the 2pc target. Economists had predicted a fall to 1.5pc. The figures underlined unexpected resilience to deflationary pressures,

The ONS data suggested that the relative weakness of the pound was responsible, pushing up the price of imported goods and keeping inflation in positive territory despite the recession.

Charles Davis, economist at the Centre for Economics and Business Research, said: "Part of this is due to the sterling depreciation which, despite gains over the last month, is significantly weaker than a year ago."

It means the UK is the only one of the world's six biggest economies to avoid deflation. The pound rose more than
2 cents against the dollar after the inflation figures were published, closing at $1.653.

In July, price rises in games, toys, and hobby-related items – which are largely imported – helped to keep inflation at 1.8pc, offsetting falls in food inflation. Kerri Maddock at Barclays Capital said that the trend should "steer the economy away from the tail risk of outright deflation".

Although falling prices provide some relief for struggling households during recession, a sustained period of deflation in the UK caused by weak demand would likely damage the economy further, prompting businesses to produce less and therefore shed jobs, leading to higher unemployment which would in turn hit spending even further.

The continued strength of the CPI has taken the Bank of England by surprise. Governor Mervyn King said last week that despite the so-called "stickiness" shown by UK prices, the CPI rate was "more likely than not" to fall below 1pc in the coming months.

Despite the figures, economists said that inflation should start to fall again in the coming months as the impact of the weaker pound fades, while electricity and gas bills fall, food inflation drops and the full disinflationary impact of the spare capacity in the economy feeds through.

In a further surprise, the broader retail prices index (RPI), which also includes housing and mortgage costs, actually rose to -1.4pc in July from -1.6pc.