Three things we've learnt about the UK economy from the IMF

Countries worldwide have recently undergone an economic outlook assessment conducted by the esteemed International Monetary Fund (IMF).

The IMF's insights carry significant weight; its primary objective is to ensure global economic stability, and its biannual forecasts offer an authoritative glimpse into the current economic landscape.

However, it is important to recognize that all forecasts have the potential to be inaccurate, and thus should not be regarded as definitive.

Here are three key takeaways regarding the UK economy from the IMF's latest report.

1. We are navigating the Iran war's effects better than anticipated

The global economy has faced considerable upheaval due to the ongoing war between the US and Israel involving Iran.

This conflict has severely disrupted the transportation and production of energy throughout the Middle East, leading to increased oil prices and heightened inflation.

To mitigate the escalation of price increases, central banks, including the Bank of England, are anticipated to raise interest rates in the coming months.

Nevertheless, the IMF has indicated that the global economy is performing significantly better than expected, largely due to a surge in investments in artificial intelligence (AI).

This is promising news for the UK. The IMF has projected that the UK economy will expand by 1.3% in 2026, a revision from the previously forecasted 1% in July, before experiencing a slowdown in 2027.

A growing economy typically results in increased business investments and hiring, while consumers enjoy enhanced purchasing power. Conversely, a contracting economy prompts the opposite outcomes.

2. We are outperforming other major economies

As concerns mount regarding national borrowing levels, the IMF reports that the UK is faring better than its major counterparts in this regard.

According to the IMF, the UK "effectively stands out, alongside India," in addressing borrowing issues, with the expectation that by 2031, it will possess the lowest annual borrowing rate among the G7 nations, which includes Canada, France, Germany, Italy, Japan, and the US.

Sir Howard Davies, former deputy governor of the Bank of England, attributes this achievement to the UK having a majority government committed to tackling the situation, likely through a combination of tax increases, reductions in public services, or both.

In contrast, he notes that the US has made minimal statements about deficit reduction, while France and Germany lack majority governments.

Thus, he states, "So, we [the UK] are not great students, but we look somewhat better than some of the others we are sharing the class with."

Additionally, the IMF’s growth predictions suggest that the UK will maintain the second-fastest growing economy in the G7 this year, alongside Germany.

Sir Howard emphasizes the need to view this in perspective, stating, "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."

3. However, we may face further challenges

While the IMF has raised its growth projection for the UK in 2026, it has slightly revised down its forecasts for the upcoming year.

Despite the UK’s resilience in managing the economic repercussions of the Iran war thus far, the IMF warns that conditions are likely to shift next year due to persistent high energy prices and elevated interest rates, which may affect consumer spending and corporate investment.

Moreover, households are expected to continue experiencing the pressure of rising costs. The IMF forecasts that inflation in the UK will average 3.3% this year, and has raised its estimate for next year to 2.8% from the previous prediction of 2.4%.

"There will be increasing inflationary pressure put on the UK, and the Bank of England will have to consider further rate hikes," states Tim Armitage, investment strategist at Quilter Cheviot.

He notes that at least one interest rate increase is anticipated this year, with additional hikes likely next year.