The International Monetary Fund raised its UK economic growth forecast to 1.3% for 2026, up from 1% predicted in July, citing better-than-expected global performance driven partly by artificial intelligence investment. The IMF slightly downgraded its 2025 forecast, however, citing expected pressure from elevated energy prices and interest rates on consumer spending and business investment.
The IMF highlighted the UK's borrowing position as stronger than peer economies. By 2031, the UK is projected to have the lowest annual borrowing among G7 nations, the fund said. Sir Howard Davies, former deputy governor of the Bank of England, attributed this partly to the UK government holding a parliamentary majority committed to deficit reduction through tax rises, public service cuts, or both. Davies contrasted this with the US, which has said little about deficit reduction, and France and Germany, which lack majority governments.
The UK is forecast to have the second-fastest growing economy in the G7 this year alongside Germany, though Davies cautioned that growth remains slow. "We're still growing slowly. It's almost like saying we're winning a slow bicycle race here because other people are going backwards a bit more rapidly than we are," he said.
Inflation pressures are mounting. The IMF forecasts UK inflation will average 3.3% this year and raised its 2025 estimate to 2.8% from a previous prediction of 2.4%. The upgrade reflects the economic fallout from the US-Israel war with Iran, which disrupted Middle East energy transportation and production, pushing oil prices higher.
Tim Armitage, investment strategist at Quilter Cheviot, said the Bank of England will likely raise interest rates further. He predicted at least one rate rise this year with more expected next year, as elevated energy prices and higher borrowing costs dampen household spending and corporate investment.
The IMF cautioned that its forecasts can prove incorrect and should not be treated as definitive.