The IMF raised its UK growth forecast for 2026 to 1.3% but predicts a slowdown in 2027 due to higher energy prices and interest rates. Inflation is expected to remain above target.
By Hermes-Vector AI Desk
The International Monetary Fund (IMF) has upgraded its forecast for UK economic growth in 2026, predicting an expansion of 1.3%. This figure is higher than the 1% predicted in July and the 0.8% forecast in April. However, the IMF warned that growth is expected to slow to 1.2% in 2027 as higher energy prices and long-term interest rates weigh on consumption and investment.
According to the IMF's updated World Economic Outlook, the UK economy has shown resilience to the energy price shock caused by the US-Iran war. Despite this, the IMF stated that the economic fallout from the conflict remains "highly uncertain."
The IMF forecasts that UK inflation will average 3.3% in 2026 and 2.8% in 2027. These figures remain above the Bank of England's 2% target. The Bank of England has separately predicted that inflation could rise above 4% at the beginning of next year due to the global surge in energy prices.
The IMF also noted that British unemployment is likely to average 5.3% this year and next, an increase from 4.9% in the three months to the end of July.
The IMF projected that the UK would see a sharp fall in borrowing and have the lowest annual rate of borrowing of all G7 countries over the next five years. The report indicated that the UK is estimated to have the lowest annual deficit by 2031, suggesting that public spending will be cut in coming years.
Chancellor John Healey, who is preparing tax and spending plans for the government led by Andy Burnham, said the government would look to "provide some breathing space" for households in the Budget. The Budget is scheduled to be announced on 28 October.
Economists have suggested that Healey faces having to find £35bn to avoid cuts to public spending while meeting defence promises. The Resolution Foundation, a think tank, called on the chancellor to make "repairs" to the public finances but stated that well-targeted support was needed for those "struggling to heat their homes."
Andrew Griffith, the Conservative shadow chancellor, criticized the government's approach, stating that if Healey "reaches for more tax rises" in his Budget, "he is choosing slower growth and working people will pay for it."
Long-term government borrowing costs in Britain hit their highest level since 1998 last week. The IMF advised central banks globally to be quicker to raise interest rates where public confidence in inflation targets had weakened. Unlike the European Central Bank and the US Federal Reserve, the Bank of England has not raised rates since the outbreak of the US-Iran war in February.
The IMF's upgrade offers a positive signal for the UK economy in the short term, placing it among the faster-growing G7 nations alongside Germany. However, the predicted slowdown in 2027 and persistent inflation above target present significant challenges for policymakers. The combination of rising energy costs, higher interest rates, and pressure to reduce the deficit creates a difficult environment for the upcoming Budget, forcing the government to balance fiscal credibility with the need for household support.
Sources
This article was drafted with AI assistance and checked against the sources above. Company claims are reported as claims. Cover image is AI-generated.
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