IMF upgrades UK growth but warns inflation will squeeze households

The International Monetary Fund has upgraded its forecast for UK economic growth while warning that inflation will remain a problem for households.

At its annual meetings in Bangkok, the IMF said the UK economy should grow by 1.3 per cent this year, up from an earlier forecast of 1 per cent. That makes Britain the joint second fastest growing economy in the G7 alongside Germany. But growth is expected to edge down to 1.2 per cent next year.

The upgrade is set against a difficult global backdrop. The IMF pointed to an energy crisis caused by the prolonged war in the Middle East, trade tensions between the US and China, and the boost from investment in artificial intelligence. It said the world economy had been more resilient than expected, but warned that resilience is reaching its limits.

Inflation remains the main warning. Consumer prices are forecast to rise by 3.3 per cent in 2026, up from a previous forecast of 3.2 per cent. The IMF said food and energy costs will keep rising because of the ongoing conflict in the Middle East. It also cited extreme weather and attacks on energy infrastructure. The UK is expected to have one of the highest inflation rates in the G7, alongside Italy. Higher energy prices and interest rates are likely to hit consumers next year.

For the Chancellor, John Healey, there was some positive news on the public finances. The IMF said the UK stands out among G7 countries for having a plan to narrow its deficit. It urged him to stay the course on fiscal consolidation. The UK has already started that path. Annual UK borrowing is forecast to fall by nearly 4 percentage points of GDP between last year and 2031, the sharpest fall in the G7. By 2031, the IMF expects the UK to have the smallest deficit in the group, provided the government delivers on its tax and spending plans. Last year, the UK ran the second largest budget deficit in the G7.

The IMF's chief economist said the message for the UK was simple: stay the course. But the fund also warned that sticking to lower borrowing will limit the Chancellor's options in the Budget. It said any new spending or tax cuts must be paid for. It argued that support for households should be targeted, not universal like the expensive schemes seen in 2022. Universal support could backfire, push up interest rates and cause more damage to households.

The Chancellor arrives in Bangkok tomorrow. His Budget is two weeks away. He has promised fiscal discipline but also extra help for households and businesses. The IMF's message to governments everywhere is that borrowing needs to come down and new spending or tax cuts need to be funded.

The global picture is mixed. Growth forecasts were upgraded for most G7 countries, but France was downgraded significantly and is the weakest in the group. The feared hit from the closure of the Strait of Hormuz was smaller than expected. The IMF credited a flexible supply response, lower oil consumption and more renewables. An AI investment boom has also supported growth. But the IMF warned that if the AI boom turns to bust, global growth could be dented sharply.

The UK is not well placed to benefit from the AI and energy export boom. It is a large energy importer and depends on buying AI chips from overseas. The IMF placed the UK in the part of its charts for countries that are energy importers and lack AI exports.

Households are still under pressure. Gas and electricity bills are forecast to climb again to levels not seen since autumn 2022, with the price cap expected to rise to £2,000 in January. More than 1.5 million homes use oil for heating, and oil prices have almost doubled in the past year. Those customers do not benefit from the price cap. The government has said it will regulate the market for home heating oil.

In Westminster, business leaders were invited to Downing Street and warned about possible higher taxes, including a windfall tax on banks. Unions and charities called for more help with the cost of living. The Resolution Foundation wants the government to raise £8 billion in taxes and use £2 billion for targeted energy support. The debate reflects the Chancellor's central dilemma: how to ease the cost of living without damaging business and growth.

The IMF forecasts matter, but the Chancellor's Budget decisions will matter more. The Budget in two weeks will show how serious the government is about cutting borrowing while helping households facing higher food and energy bills.