The latest IMF World Economic Outlook suggests the UK is edging slowly towards recovery, but warns the path to stability remains narrow.
Growth is projected at around 1.3% in 2025, remaining at 1.3% for 2026, as household spending and government investment spending lend support to economic activity.
Global trade frictions, rising borrowing costs, and weak productivity continue to cloud the outlook for the UK economy, but this does not make the UK an outlier — global growth is forecast to slowly decline from 3.3% in 2024, to 3.2% in 2025 and 3.1% in 2026. In this context, the UK would be the 2nd fastest growing economy in the G7, behind the USA.
The inflation picture is less positive, as the UK is projected to have the highest annual average inflation in the G7 economies in 2025 and 2026, at 3.4% and 2.5% respectively, and is expected to remain well above target for several more quarters.
That persistence limits the Bank of England’s room to cut interest rates further and complicates the Treasury’s task of stimulating much-needed growth. The silver lining in the IMF’s report is that the UK’s inflationary pressures are largely “temporary,” with the labour market expected to loosen and wage growth to moderate.
The IMF emphasises that the UK’s financial position is stable but remains stretched. Higher debt-servicing costs and slower revenue growth leave little room for fiscal manoeuvre. Any fiscal easing in the Autumn Budget will need to be carefully targeted to avoid reigniting inflation or undermining market confidence.
Overall, the IMF message is clear: the UK economy is improving but still vulnerable. The Budget must balance credibility with compassion — supporting growth and investment while keeping a firm grip on borrowing and inflation expectations.
Pierre-Olivier Gourinchas, the IMF’s chief economist, said: “A lot of the drivers of the inflation are what we see as temporary factors”, singling out the spike in water bills and transport costs. “We expect those will moderate going forward but there are some upside risks,” he went on. “There are some increases in labour costs and there are some increases in inflation expectations.”
Chancellor Rachel Reeves said: “This is the second consecutive upgrade to this year’s growth forecast from the IMF. It’s no surprise, Britain led the G7 in growth in the first half of this year, and average disposable income is up £800 since the election.
“But know this is just the start. For too many people, our economy feels stuck. Working people feel it every day, experts talk about it, and I am going to deal with it. Working together, we can deliver a Britain built for all.”
Russ Mould, investment director at broker AJ Bell, said: “The UK has an inflation problem which could constrain the Bank of England’s ability to steadily cut interest rates. That could weigh on consumers and businesses, potentially leading to more sluggish economic growth. Central banks raise rates when they’re trying to combat high inflation, and they cut them when inflation looks like it is under control.
“An inflation figure starting with ‘3’ is arguably outside of the Bank of England’s comfort zone, so it might be forced to keep interest rates steady. Normally that wouldn’t be such a problem if it wasn’t for a fragile jobs market.
“Central banks look at both inflation and labour when making interest rate decisions, and a weak jobs market might traditionally call for rate cuts. It suggests the Bank of England is stuck between a rock and a hard place.”
