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

The International Monetary Fund upgraded its 2026 growth forecast for the UK economy to 1.3% from 1%, citing stronger-than-expected global performance driven partly by artificial intelligence investment. The upgrade positions the UK for the second-fastest growth rate in the G7 this year alongside Germany, though the IMF slightly downgraded its forecast for next year as high energy prices and elevated interest rates begin to weigh on consumer spending and business investment.

The IMF identified three key developments affecting the UK. First, Middle East energy disruptions stemming from the US-Israel war with Iran have pushed oil prices higher and raised global inflation, prompting central banks including the Bank of England to plan interest rate increases. Second, despite these headwinds, the global economy has performed better than expected. Third, the IMF said the UK stands out among major economies for addressing government borrowing, with Britain projected to have the lowest annual borrowing of the G7 by 2031.

Sir Howard Davies, former deputy governor of the Bank of England, attributed the UK's fiscal progress to a government with a majority committed to tackling the deficit through tax increases, spending cuts or both. By contrast, Davies noted the US has outlined little deficit reduction strategy while France and Germany lack majority governments. "We're not great students, but we look somewhat better than some of the others we are sharing the class with," Davies said.

The IMF's revised outlook includes headwinds ahead. The fund forecasts UK inflation will average 3.3% this year and raised its 2025 estimate to 2.8% from a prior prediction of 2.4%. Tim Armitage, investment strategist at Quilter Cheviot, said at least one Bank of England rate rise is predicted this year with more expected next year. Armitage added that "increasing inflationary pressure" will be put on the UK as high energy costs persist.

The IMF cautioned that while the UK has weathered the Iran conflict fallout better than expected so far, next year will bring tougher conditions. Households will likely continue feeling price pressures as elevated interest rates reduce spending power and company investment appetite weakens.