The International Monetary Fund has raised its growth forecast for the UK economy in 2026 to 1.0%, up from 0.8% predicted in April, citing strong pre-war momentum and a robust first quarter. The upgrade, part of the IMF's annual Article IV assessment, offers some relief to the government amid ongoing economic challenges.
The IMF urged Britain to 'stay the course' on reducing government borrowing, praising Chancellor Rachel Reeves for striking 'a good balance between deficit reduction and growth-friendly spending.' The fund stressed the importance of continued deficit reduction given market pressures and elevated implementation risks.
However, the IMF warned that the war in the Middle East is dampening near-term prospects, with higher energy prices expected to push inflation up temporarily and delay the return to the central bank's target by about a year. Growth is projected to slow to 1.0% this year before gradually recovering.
In a separate development, a sell-off in UK government bonds reversed after a drop in oil prices, with 30-year bond yields falling to 5.76% from multi-year highs. The FTSE 100 index closed 1.26% higher, led by utility stocks.
The IMF also suggested that Britain may need to consider changes to the pensions triple lock or introduce more NHS charges to manage fiscal pressures. Business investment in the UK has lagged behind the US, with preliminary figures showing an 11% rise since before the pandemic, compared to 28% in the US.
