The International Monetary Fund (IMF) has revised its growth projections for the United Kingdom, indicating that the economic impact of the Iran war is less severe than previously feared. However, the institution warns that inflation is set to rise and borrowing costs will remain elevated.
Improved Growth Outlook
The IMF now forecasts UK gross domestic product (GDP) to grow by 1% in 2026, an upgrade from the 0.8% predicted last month. This adjustment comes despite ongoing global energy shocks stemming from the conflict in the Middle East. The new figure is still lower than the 1.3% growth anticipated in January 2026 and the 1.5% forecast for 2027 before the war began.
First Quarter Performance
Official data revealed that the UK economy expanded by 0.6% in the first quarter of 2026, surpassing economists' expectations and marking the strongest quarterly growth in a year. However, analysts caution that this growth may have been partly driven by "front-loading" in March, as businesses and consumers accelerated activity to preempt supply shortages and price increases. The pace of expansion is expected to decelerate as the war's effects become more pronounced.
Inflation and Interest Rates
The IMF projects that inflation will peak at just below 4% by the end of 2026 before gradually easing, reaching the Bank of England's 2% target in the second half of 2027. Interest rates are anticipated to remain at 3.75% for the remainder of the year, contrary to some economists who predict a rate hike to curb inflation. The IMF stated that once the energy price shock dissipates, growth should recover in the latter part of 2027.
Risks to Forecast
The primary risk to the outlook is a prolonged war in the Middle East, which could keep energy and food prices high for an extended period and sustain global market volatility, undermining confidence and economic activity.
Government Response
Chancellor Rachel Reeves welcomed the IMF's upgraded forecasts, stating: "The IMF upgrading its growth forecasts and backing our fiscal strategy is yet more proof that this Government has the right economic plan. The choices I have made as Chancellor mean our economy is in a stronger position as we deal with the costs of the war in Iran. Putting our stability at risk when signs of progress are emerging would leave families and businesses worse off. Instead, this Government is getting on with the job of building an economy that is stronger, more resilient, and prepared for the future."
