The International Monetary Fund upgraded its forecast for UK economic growth in 2026 to 1.3%, up from 1% predicted in July, but warned that higher energy prices and interest rates will slow expansion to 1.2% in 2027.
The IMF's World Economic Outlook, released Tuesday, attributes the resilience partly to global economies absorbing the energy price shock from the US-Iran war more effectively than feared. However, the fund cautioned that economic fallout from the conflict remains "highly uncertain".
Chancellor John Healey will present his first Budget on 28 October. He faces pressure from multiple directions. Government borrowing costs have risen sharply, forcing him to maintain credibility with financial markets. The Resolution Foundation called for both deficit reduction and targeted support for households struggling with energy costs this winter.
IMF Chief Economist Silvana Tenreyro told BBC News that the UK "stands out" among G7 economies in its debt management approach. The UK is on course to reduce annual borrowing by nearly four percentage points of GDP between 2025 and 2031, more than any other major economy in the group. Tenreyro urged the government to "stay the course" on fiscal consolidation.
The upgraded growth forecast places the UK second only to Germany in G7 expansion this year. But headwinds are building. The IMF projects inflation will average 3.3% in 2026 and remain above the Bank of England's 2% target at 2.8% in 2027. The Bank of England itself has predicted inflation could exceed 4% at the start of 2027, potentially forcing interest rate rises.
Conservative opposition leader Andrew Griffith warned that additional tax rises in the Budget would "choose slower growth" and make working people bear the cost. Within his own party, some have criticized Healey's regional growth strategy pledging "good growth in every postcode."
Healey said the government would seek to "provide some breathing space" for households facing the dual pressure of rising energy prices and interest rates. He is meeting with other finance ministers at the IMF's annual meeting in Bangkok on Tuesday to discuss limiting the economic impact of Middle East and European conflicts.