UK Growth Forecast Upgraded but Higher Energy Prices to Hit Economy Next Year
BBC News
By Faisal Islam, Economics editor, and Michael Race, Business reporter
The UK economy is set for a stronger-than-expected performance this year, with a growth rate of 1.3% in 2026, up from the previously forecast 1%, according to the International Monetary Fund (IMF). However, the organization warns that higher energy prices and interest rates will slow down the economy in 2027.
The IMF's latest report, a closely watched guide for the government, highlights the resilience of global economies in the face of the energy price shock caused by the US-Iran war. Yet, it acknowledges the "highly uncertain" economic fallout from the conflict.
Chancellor John Healey has pledged to offer "breathing space" for households in the upcoming Budget. With preparations underway for the new-look government's tax and spending plans on October 28, the chancellor faces pressure to ensure his plans are financially viable in the eyes of markets.
IMF chief economist Silvana Tenreyro praised the UK's debt management process, noting that it is leading major G7 economies. "The UK has already started the consolidation process and it is the country that basically stands out, along with India," she stated.
While the IMF's forecasts are influential, they are not infallible. Tenreyro emphasized the need for the UK to "stay the course" in its debt reduction efforts, reiterating calls for advanced economies to cut borrowing and reduce debt levels.
The IMF's outlook suggests:
- The UK is projected to have the second-fastest growing economy in the G7 this year, alongside Germany.
- Growth is expected to slow to 1.2% in 2027 due to higher energy prices and long-term interest rates.
- UK inflation is anticipated to average 3.3% this year, with a slight increase to 2.8% next year.
- Despite global conflicts, the global economy is showing resilience, driven by investment in Artificial Intelligence (AI).
Healey acknowledged the impact of Middle East and European wars on the UK and global economies but emphasized the country's economic resilience.