The International Monetary Fund upgraded its growth forecast for the UK economy to 1.3% in 2026, up from 1% predicted in July, citing better-than-expected global economic performance driven by artificial intelligence investment. The upgrade comes despite disruption to Middle East energy production from the US-Israel war with Iran, which has pushed oil prices higher.
The IMF projects the UK will have the second-fastest growing economy in the G7 this year alongside Germany. However, Sir Howard Davies, former deputy governor of the Bank of England, cautioned that the UK remains a slow-growth economy. "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.
The fund slightly downgraded its forecasts for UK growth next year, predicting that high energy prices and elevated interest rates will constrain consumer spending and corporate investment. The IMF also raised its inflation estimate for next year to 2.8% from 2.4%, forecasting average inflation of 3.3% this year. Tim Armitage, investment strategist at Quilter Cheviot, said at least one Bank of England rate rise is predicted this year, with more expected next year.
Among the G7 nations, the UK stands out for its approach to government borrowing. The IMF said the UK "basically stands out, along with India" in addressing the debt problem and is projected to have the lowest annual borrowing of the G7 by 2031. Davies attributed this partly to the UK having a government with a parliamentary majority committed to tackling the deficit through tax rises, cuts to public services, or both. By contrast, he noted the US has said little about reducing its deficit, while France and Germany lack majority governments.
The IMF's twice-yearly forecasts carry significant weight in shaping global economic policy, though like all forecasts they can prove incorrect.