(Commonwealth _Europe) The UK economy is forecast to grow at a slightly stronger pace in 2025 than previously anticipated, according to the International Monetary Fund (IMF), signaling cautious optimism about the country’s ongoing recovery. In its latest annual economic assessment, the IMF has upgraded its growth forecast for the UK to 1.2% for 2025, a modest improvement over the previously issued 1.1% projection. The forecast for 2026 also saw a small upward revision, with growth now expected to reach 1.4%.
This adjustment reflects a notable turnaround from the IMF’s earlier position and is underpinned by stronger-than-expected economic performance in the first quarter of 2025. The IMF noted that this rebound indicates that a recovery is underway, with increased consumer confidence and business investment serving as key drivers of momentum.
Luc Eyraud, the IMF’s mission chief for the UK, described growth in the first three months of the year as “very strong,” highlighting that consumer spending had picked up significantly while businesses ramped up investment in anticipation of improving economic conditions. However, Eyraud cautioned that these figures were recorded before the implementation of new import tariffs by the United States and an increase in UK employer tax contributions that came into force in April. These measures are likely to place additional pressure on business margins and could dampen investment going forward.
In its assessment, the IMF commended the UK government’s planning reforms and infrastructure investment initiatives, describing them as well-targeted and potentially transformative. If properly executed, these reforms could serve as an important engine for long-term growth. The IMF also pointed to these efforts as a reflection of the government’s broader commitment to enhancing the country’s economic competitiveness.
Despite these positive developments, the IMF emphasized that the government faces significant fiscal challenges, particularly in maintaining discipline on day-to-day public spending amid a high degree of global economic uncertainty and ongoing financial market volatility. The Fund urged Chancellor Rachel Reeves to remain committed to the UK’s self-imposed fiscal rules, which it identified as critical for maintaining market confidence and long-term economic stability.
Currently, the UK government’s fiscal framework is anchored around two primary commitments: ensuring that day-to-day public spending is fully funded by tax revenues and reducing the national debt as a proportion of GDP by the end of the current parliamentary term in 2029–30. The IMF acknowledged the importance of these rules but also suggested a possible modification to reduce the frequency of fiscal evaluations by the Office for Budget Responsibility (OBR) from twice annually to once, to streamline fiscal management and reduce short-term political pressure.
The global backdrop, however, poses significant headwinds to UK growth prospects. The IMF flagged a range of external risks, including persistent global trade tensions, weaker demand among the UK’s key trading partners, and the disruptive effects of tariffs imposed by the US administration under President Donald Trump. These challenges, it warned, could reduce UK growth by an estimated 0.3% by 2026.
Nevertheless, the IMF acknowledged recent progress on trade, pointing to new agreements with the European Union, India, and the United States as positive steps toward establishing a more predictable and stable trade environment for UK exporters. These deals, it noted, underscore the government’s ongoing commitment to restoring the UK’s position as a global trading partner.
Chancellor Reeves welcomed the IMF’s revised outlook, describing it as a validation of the government’s approach to economic and trade policy. She emphasized that recent trade agreements were already having a positive effect by safeguarding jobs, encouraging investment, and contributing to price stability. However, political tensions remain high, with opposition figures continuing to challenge the government’s fiscal strategy.
Shadow Chancellor Mel Stride criticized Reeves for what he described as a lack of credibility in managing the public finances, accusing her of already manipulating fiscal targets to permit increased borrowing. He warned that any further dilution of the fiscal framework could erode market confidence, leading to potentially adverse consequences for the broader economy.
The IMF’s latest update also revisited its inflation outlook. In April, the Fund had downgraded UK growth expectations partly due to elevated borrowing costs, rising tariffs, and inflationary pressure. At that time, it forecast inflation would fall to 2.2% by 2026, nearing the Bank of England’s official 2% target. However, more recent data from the Office for National Statistics (ONS) showed that inflation had unexpectedly risen to 3.5% in April, up from 2.6% in March.
The IMF now anticipates that inflation will remain above the target level for the remainder of 2025 before gradually easing in the latter half of 2026. This elevated inflationary environment could complicate monetary policy decisions and place additional strain on household budgets, particularly if wage growth fails to keep pace.
The IMF’s revised assessment provides cautious encouragement about the UK’s near-term economic prospects, highlighting areas of strength such as consumer activity and infrastructure investment. However, it also illustrates the need for fiscal discipline and proactive policymaking in the face of persistent global challenges, inflationary pressures, and political scrutiny.
