The UK economy is expected to grow slightly more than previously anticipated in 2025, with the International Monetary Fund (IMF) forecasting a 1.2% growth this year and a slight increase to 1.4% in 2026. However, the IMF has cautioned Chancellor Rachel Reeves that she must adhere to her self-imposed fiscal rules on tax and spending, despite the positive outlook following a strong first quarter of growth.
Economic Recovery Underway but Challenges Persist
The IMF’s latest report highlights a “strong” start to the year, driven by an increase in consumer spending and business investment. This economic recovery comes after the IMF had previously downgraded its growth forecast for 2025 from 1.6% to 1.1%. Despite the upbeat outlook for this year, the IMF noted that global uncertainties, volatile financial markets, and challenges in managing day-to-day spending would require the Chancellor to make tough fiscal decisions moving forward.
Reeves’ Fiscal Rules and IMF Recommendations
While the IMF acknowledged the government’s planning reforms and infrastructure investment plans, it urged some flexibility with the UK’s fiscal rules. The IMF suggested reducing the frequency of the Office for Budget Responsibility (OBR) assessments from twice a year to once, to provide more realistic timelines for fiscal policy. However, the UK government has emphasized that its fiscal rules are “non-negotiable,” with Chancellor Reeves aiming to ensure day-to-day government costs are covered by tax income, rather than borrowing, and to reduce debt as a share of national income by 2029/30.
Global Trade Tensions and UK Growth in 2026
Looking ahead, the IMF warned that global trade tensions would weigh on UK growth, with reduced activity among trading partners and the impact of U.S. President Donald Trump’s tariffs. These factors, combined with persistent uncertainty, are expected to reduce next year’s growth by 0.3% by 2026. However, the IMF pointed out that the UK’s trade agreements with countries such as the EU, India, and the U.S. show a commitment to creating a more predictable environment for UK exporters, which could help mitigate some of the challenges.
Inflation and Economic Risks
The IMF also addressed the rising inflation in the UK, which unexpectedly jumped to 3.5% in April, up from 2.6% in March. Although the IMF still expects inflation to slow to 2.2% by 2026, close to the Bank of England’s target of 2%, it indicated that the inflation rise would persist into the second half of this year, with a return to target expected later in 2026. The impact of rising inflation, along with U.S. tariffs and increased borrowing costs, has contributed to the IMF’s more cautious growth outlook for the UK.
