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The International Monetary Fund (IMF) has updated its outlook for the UK economy, projecting stronger growth this year than previously anticipated, before challenges from rising energy costs and interest rates cause a slowdown in 2027. According to the IMF’s latest report, which is closely scrutinized by the UK government, the economy is now expected to expand by 1.3% in 2026, an upward revision from the 1% growth forecast given in July. However, growth is forecast to decelerate to 1.2% in 2027, largely due to the impact of higher energy prices and increased borrowing costs on household spending and business investment.
The organisation highlighted that global economies have demonstrated resilience in the wake of the energy supply disruptions linked to the US-Iran conflict, though it cautioned that the economic repercussions stemming from this war remain highly uncertain. Chancellor John Healey has indicated that the government plans to ease some of the pressures facing households in the upcoming Budget, which is scheduled for announcement on 28 October as part of the new administration led by Andy Burnham. Healey’s fiscal strategy will need to address rising government borrowing costs, a factor that intensifies the challenge of maintaining market confidence in the UK’s financial credibility.
IMF Chief Economist Silvana Tenreyro praised the UK’s approach to debt management, noting that it is ahead of many G7 countries in this respect. Speaking to BBC News, Tenreyro emphasized that the UK has “already started the consolidation process” and stands out alongside India in efforts to stabilise national debt levels. The IMF projects that from 2025 to 2031, the UK will reduce its annual borrowing by nearly four percentage points of GDP, a significantly larger correction compared to other G7 nations, many of which are expected to see escalating deficits over this period. Additionally, the UK is predicted to have the lowest annual borrowing in the G7 by 2031 and will benefit from the longest maturity of debt, which helps secure lower interest rates for an extended period. Tenreyro encouraged the UK to “stay the course” in this fiscal consolidation journey.
While the UK is now forecast to be among the fastest growing economies in the G7 alongside Germany, the anticipated slowdown in 2027 reflects ongoing challenges including higher energy prices and sustained inflationary pressures. Inflation is expected to average 3.3% this year and remain above the Bank of England’s 2% target at 2.8% in 2027, with the Bank warning it could rise above 4% early next year, increasing the likelihood of further interest rate hikes. Healey recognizes the impact of conflicts in the Middle East and Europe on both UK households and the wider global community but describes the economy as exhibiting “strong international resilience.” Ahead of the Budget, there is mounting pressure on Healey to reconcile the need for continued borrowing cuts with demands for targeted support for those struggling with the cost of living, especially as think tanks and politicians voice differing views on how best to balance growth and fiscal responsibility
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