The UK economy is set to grow by 1.3% this year, up from the previously predicted 1% in July, according to forecasts from the International Monetary Fund (IMF).
While the IMF has increased its growth forecast for this year, it expects to slow in 2027 to 1.2% as higher energy prices and long-term interest rates weigh on consumption and investment.
UK households will face a sharper rise in inflation than previously forecast, which will remain higher for longer.
The IMF says it expects UK inflation to average 3.3% for this year, while also increasing its forecast for inflation to 2.8% for 2027.
Commenting on the latest forecast, Quilter Cheviot investment strategist Tim Armitage says the forecast will be “music to the ears of the Chancellor ahead of the Budget in a little over two weeks’ time”.
Armitage adds: “The IMF has previously said the UK was most exposed developed economy to the conflict in the Middle East and the inflationary impacts that have ensued. This has clearly not proven to be the case and there are actually other green shoots too, particularly given the current backdrop of rising global bond yields.”
“The UK is seen as one of the only major economies to be bringing down its deficit over the coming years, something that would give the government some breathing room. It will be interesting to see if markets believe this to be the case given the yield premium gilts have faced in recent years relative to peers.”
“Certainly focus now appears to be trained on the US and France and whether or not their fiscal positions are becoming unsustainable, so the more the UK can stay under the radar the better from a market perspective.”
“That said, in this volatile and uncertain world, things are never straightforward. Growth for next year has been downgraded for the UK, slowing to 1.2% as rising energy costs and interest rates bite. Indeed, for as along as conflict continues in the Middle East there will be increasing inflationary pressure put on the UK and the Bank of England will have to consider further rate rises.”
“At least one is expected this year, with more to come in the first half of 2027, but the worry then starts to become how long the economy can withstand tight monetary policy conditions for.”
Also commenting, Wealth Club chief investment strategist Susannah Streeter says the IMF has offered “a cautious vote of confidence in the UK economy” with the upgrade to its growth forecast for this year but warns “it’s still not going to be plain sailing on the horizon ahead”.
Streeter comments: “It means there’s been some respite for the government in the bond markets, with gilt yields retreating from recent highs, offering a little relief from the punishing cost of servicing the national debt.”
“The IMF’s guarded endorsement of the government’s tax and spending plans may help ease some of the risk premium that has been hanging over UK assets. But this is a tentative reprieve rather than an all-clear, with the Budget still looming and investors watching closely for evidence that the government can keep its finances on a sustainable footing.”
“There are other encouraging signs that the economy is holding up better than feared. More robust retail sales figures suggest consumers are continuing to spend despite pressure on household budgets, while stronger-than-expected growth earlier in the year has helped underpin the IMF’s upgrade.”
“But the risk is that a more resilient economy could also make the inflation battle more complicated. Markets are still factoring in multiple interest rate hikes, as policymakers worry that sustained energy price pressures could become more deeply embedded in the economy through wages, business costs and consumer prices.”
“The IMF expects UK inflation to average 3.3% this year and 2.8% in 2027, suggesting the return to the Bank of England’s 2% target will be a slow and potentially bumpy journey.”
“For now, the UK has secured a little more breathing space, but the challenge is to turn that tentative improvement in sentiment into something more long-lasting.”
Moneyfacts personal finance analyst Caitlyn Eastell adds that the forecast offers “a glimmer of hope”.
Eastell explains: “The concern is that the UK is still forecast to have the second-highest inflation rate in the G7, averaging 3.3% this year, and remaining above the Bank of England’s 2% target throughout 2027.”
“This could complicate the Bank of England’s efforts to rein in inflation. Some economists are anticipating a possible interest rate hike in November, which could further dampen prospective homeowners hopes of getting on the property ladder, and borrowers due to remortgage later this year are likely going to face significant jumps in their monthly repayments.”
“Uncertainty is a likely theme in the coming months, so households should take a proactive approach to their finances instead of relying on things improving. Those approaching remortgaging should review their options early, compare available deals and stress-test their budgets. Prospective homebuyers should also factor in the possibility of borrowing costs remaining elevated for longer.”
