'Recovery will be choppy'.
The Chancellor said there were grounds for "cautious optimism" over the country's prospects, despite figures showing CPI inflation still above target at 3.1%.
But he also warned that the situation could deteriorate quickly if the Government goes into "denial" over the scale of its deficit, and does not follow through on tough spending curbs.
Speaking at Bloomberg's London offices, Mr Osborne said: "Here in Britain we can start to be cautiously optimistic about the economic situation.
"GDP growth in the second quarter surpassed expectations at 1.1%, with all but 0.2% of that coming from the private sector.
"Employment is growing at the fastest pace for over a decade, confounding predictions that the economy cannot generate private sector jobs.
"Manufacturing is picking up and exports are recovering thanks to increasing global demand."
* MR OSBORNE: Cautiously optimistic