The International Monetary Fund has upgraded its forecast for UK economic growth, but warned that higher energy prices and interest rates will curb the pace of expansion in 2027.
In its latest report, watched closely by the government, the IMF said the UK economy would grow by 1.3% in 2026 — an increase on the 1% it projected in July — before easing to 1.2% in 2027.
The fund said economies around the world had proved more resilient than expected to the energy price shock caused by the US-Iran war, but cautioned that the economic fallout from the conflict remained “highly uncertain”.
The revised figures reverse downgrades made at the start of the war and leave the UK as the joint second-fastest growing economy in the G7, alongside Germany.
The IMF also projected a sharp fall in UK borrowing, forecasting the lowest annual rate of borrowing of all G7 countries over the next five years. It estimates the UK will hold the lowest annual deficit — the difference between what the government spends and what it collects in taxes — by 2031, suggesting public spending will be cut in the coming years. The head of the IMF has previously called on advanced economies to reduce borrowing and bring down debt levels.
Chancellor John Healey said the government would look to “provide some breathing space” for households in the Budget. He is making the final preparations to the tax and spending plans of Andy Burnham’s new-look government, which will be announced on 28 October.
Government borrowing costs have surged, placing pressure on the chancellor to ensure his plans are seen as credible by financial markets, on which the UK relies to raise money.
Healey acknowledged that wars in the Middle East and Europe were “hitting people in the UK and around the world”, but added that “Britain’s economy is showing strong international resilience”.
When an economy grows, businesses tend to invest more, jobs are created and people on average tend to feel better off. The opposite can happen if the economy stagnates or shrinks.
The IMF said households were likely to continue feeling the squeeze of rising prices, with inflation expected to average 3.3% this year and to remain above the Bank of England’s 2% target in 2027, at 2.8%. The Bank has itself predicted inflation could rise above 4% at the beginning of next year, making it more likely that interest rates will increase.
Economists have suggested Healey faces having to find £35bn to avoid cuts to public spending while meeting defence promises in his first Budget.
On Tuesday, the Resolution Foundation called on the chancellor to “make repairs” to the public finances, but said well-targeted support was needed for those “struggling to heat their homes”. The think tank said: “The challenge of continuing to bring down borrowing must be paired with the pressing need for fresh cost of living support to help families facing a difficult winter ahead.”
Andrew Griffith, the Conservative shadow chancellor, said that if Healey “reaches for more tax rises” in his Budget, “he is choosing slower growth and working people will pay for it”.
Burnham has pledged to create “good growth in every postcode” as part of plans to give nations and regions more control, but his strategy has faced criticism inside his own party.
Healey is expected to meet other finance ministers at the IMF’s annual meeting in Bangkok, Thailand, on Tuesday to discuss how the economic impact of the Middle East and European conflicts could be limited.
The IMF said the global economy had shown a “remarkable capacity to absorb shocks”, not only from the current Middle East conflict but also from the Covid pandemic and Russia’s invasion of Ukraine.
By Faisal Islam, Economics editor, reporting from Bangkok, and Michael Race, Business reporter, reporting from London.
COMMENTS