UK growth forecast upgraded but higher energy prices to hit economy next year

The International Monetary Fund (IMF) projects an increase in the UK economy's growth trajectory for the current year, although it warns that elevated energy prices and interest rates will exert pressure on economic growth in 2027.

According to the IMF's latest assessment, which holds substantial importance for government policymaking, the UK economy is anticipated to grow by 1.3% in 2026, a revision from the previous estimate of 1% made in July. However, growth is expected to decelerate in 2027.

The IMF noted that global economies have displayed a greater resilience to the energy price disruptions stemming from the US-Iran conflict, yet it cautioned that the broader economic repercussions of this situation remain "highly uncertain."

Chancellor John Healey emphasized the government's intention to "provide some breathing space" for households in the forthcoming Budget. Healey is currently finalizing the updated tax and spending framework proposed by Andy Burnham’s government, with a formal announcement scheduled for 28 October.

Rising government borrowing costs are adding pressure on the chancellor to ensure that his proposals maintain credibility in the eyes of financial markets, which are vital for the UK's borrowing capacity.

Silvana Tenreyro, the IMF's chief economist, remarked to BBC News on Tuesday that the UK's debt management strategies are setting a precedent among the major G7 economies. "The UK has already commenced its debt consolidation process and distinguishes itself alongside India," she stated.

The IMF report characterized the UK as one of the few significant economies on track to stabilize its national debt levels, projecting it will have the lowest annual borrowing in the G7 by 2031.

When asked if the UK was among the nations being advised by the IMF to reduce borrowing, Tenreyro clarified that the country has already initiated this process and should "stay the course."

Historically, the head of the IMF has encouraged advanced economies globally to minimize borrowing and lower debt levels.

While the IMF's forecasts carry weight, they represent best estimates rather than certainties, as actual outcomes can diverge significantly due to unforeseen global events.

Additionally, the chancellor's decisions in the Budget will rely on forecasts from the UK's official forecaster, the Office for Budget Responsibility, rather than solely on IMF projections.

IMF Predictions

The projections outlined in the IMF's latest World Economic Outlook indicate:

• The UK is anticipated to exhibit the second-fastest economic growth in the G7 this year, alongside Germany.
• Growth in the UK is forecasted to moderate to 1.2% next year, driven by higher energy prices and elevated long-term interest rates impacting household expenditures and business investments.
• The IMF expects UK inflation to average 3.3% this year, with an upward revision for next year's inflation forecast to 2.8%.
• The organization noted a "resilient" global economy amidst the ongoing conflict in the Middle East, bolstered by increased investment in artificial intelligence.

'Slow bicycle race'

Chancellor Healey acknowledged the adverse impact of conflicts in the Middle East and Europe on communities in the UK and globally. He also highlighted that "Britain's economy is showing strong international resilience."

Economic growth typically leads to increased business investments, job creation, and improved general prosperity. Conversely, stagnation or contraction can produce contrasting outcomes.

Sir Howard Davies, a former deputy governor of the Bank of England, conveyed to the BBC that while the IMF's growth forecast appeared "better than it might have been," the projections for 2027 remained relatively "pessimistic."

He compared the economic landscape to a "slow bicycle race," pointing out that while the UK is progressing, it is only marginally better compared to nations experiencing sharper declines.

Sir Howard characterized the UK as somewhat peripheral to the global economic stage, contending that the IMF's primary focus is on the United States and its increasing debt levels.

He stated, "This situation is influencing interest rates across the globe, which continues to affect us as well. Unless the US addresses its deficit, we can anticipate elevated interest rates, consequently raising our debt interest expenses."

Furthermore, he expressed that the IMF's commendation of the UK in its forecast for tax increases may not materialize as anticipated.

Economists have indicated that Chancellor Healey is likely to confront the challenge of identifying £35 billion in order to avoid reductions in public spending while simultaneously fulfilling defense commitments in his inaugural Budget.

On Tuesday, the Resolution Foundation called on the chancellor to address public finance repairs, emphasizing that appropriately targeted assistance is essential for those "struggling to heat their homes."

Andrew Griffith, the Conservative shadow chancellor, remarked that if Healey opts for additional tax increases in the Budget, "he is opting for slower growth, which will ultimately be felt by working individuals."