UK growth upgraded but energy prices and rates to bite in 2027

The International Monetary Fund has upgraded the UK's growth forecast to 1.3% for 2026, up from 1% predicted in July, but warns that higher energy prices and interest rates will slow expansion to 1.2% in 2027.

The IMF's World Economic Outlook, released Tuesday, attributes the improved near-term outlook to economies proving more resilient to energy shocks triggered by the US-Iran war than initially feared. However, the organisation cautioned that economic fallout from the conflict remains "highly uncertain."

The upgrade positions the UK as the second-fastest growing economy in the G7 alongside Germany, reversing downgrades made at the start of the US-Iran conflict.

IMF Chief Economist Silvana Tenreyro told BBC News the UK stands out among major economies for already beginning debt consolidation. The IMF projects the UK will reduce annual borrowing by nearly four percentage points of GDP from 2025 to 2031, significantly more than other G7 nations, many of which are increasing deficits over this period. The UK is projected to have the lowest annual borrowing in the G7 by 2031 and the longest maturity of debt, locking in lower rates longer.

Tenreyro advised the UK to "stay the course" on reducing borrowing.

Chancellor John Healey said the government would provide "breathing space" for households in his Budget announcement on 28 October. Government borrowing costs have surged, placing pressure on Healey to present credible fiscal plans to financial markets the UK depends on for borrowing.

The IMF forecasts inflation will average 3.3% this year and remain above the Bank of England's 2% target at 2.8% in 2027. The Bank of England itself has predicted inflation could exceed 4% at the start of 2025, raising the likelihood of interest rate rises.

Households are expected to continue facing cost-of-living pressures. The Resolution Foundation called on Healey to repair public finances while providing targeted support for those "struggling to heat their homes."

Conservative shadow chancellor Andrew Griffith warned that tax rises would lead to "slower growth" and hurt working people.