The International Monetary Fund (IMF) has forecasted that the UK economy will grow by 1.3% in 2026, an increase from its previous estimate of 1% in July. However, the IMF warned that higher energy prices and interest rates are expected to impact growth in 2027, leading to a slowdown to 1.2%. The IMF noted that global economies have shown resilience to the energy price shock caused by the US-Iran war, although the economic fallout remains uncertain.
Chancellor John Healey indicated that the government aims to provide support for households in the upcoming Budget, which will be announced on 28 October. Government borrowing costs have increased, prompting the Chancellor to ensure that his plans are credible to financial markets.
IMF chief economist Silvana Tenreyro stated that the UK is leading among major G7 economies in managing its debts, having already begun the consolidation process. The IMF highlighted that the UK is on track to stabilize its national debt levels and is projected to have the lowest annual borrowing in the G7 by 2031.
While the IMF's forecasts are closely monitored, they are predictions that may not always be accurate due to global events. The UK is now expected to have the second-fastest growing economy in the G7, alongside Germany, following a reversal of earlier downgrades related to the US-Iran conflict.
Healey acknowledged the impact of conflicts in the Middle East and Europe on the UK economy but emphasized its strong international resilience. Sir Howard Davies, former deputy governor of the Bank of England, remarked that the IMF's growth forecast was better than anticipated but noted a more pessimistic outlook for 2027.
The Office of Budget Responsibility (OBR) had previously predicted a growth rate of 1.6% for the UK in 2026, while the IMF's new estimate is lower at 1.2%. Sir Howard pointed out that the IMF's focus is primarily on the US's debt levels, which influence global interest rates and, consequently, the UK's debt interest costs.
Economists have suggested that Healey may need to find £35 billion to avoid public spending cuts while fulfilling defense commitments in his first Budget. The Resolution Foundation has urged the Chancellor to make necessary adjustments to public finances while providing targeted support for those struggling with rising energy costs.
Andrew Griffith, Conservative shadow chancellor, warned that if Healey opts for more tax increases in his Budget, it could lead to slower economic growth. Meanwhile, the IMF projected that households will continue to face rising prices, with inflation expected to average 3.3% this year and remain above the Bank of England's 2% target in 2027, at 2.8%. The Bank of England has also predicted that inflation could exceed 4% at the start of next year, increasing the likelihood of rising interest rates.
Healey is scheduled to meet with other finance ministers at the IMF's annual meeting in Bangkok, Thailand, to discuss strategies for mitigating the economic impacts of conflicts in the Middle East and Europe. The IMF noted that the global economy has demonstrated a remarkable ability to absorb shocks from various crises, including the Covid pandemic and the invasion of Ukraine.