The International Monetary Fund has upgraded its forecast for UK economic growth this year but warned that the Middle East conflict will push up energy and food bills for millions of households.
In its latest report, released alongside annual meetings in Bangkok, the IMF predicted the UK's gross domestic product will grow by 1.3% in 2026, up from a previous forecast of 1%. Growth for next year is expected to slow to 1.2%, down from an earlier projection of 1.3%.
Labour market and inflation forecasts
The IMF also indicated that the shock to the labour market has been shallower than expected, with UK unemployment set to hit 5.3% this year, down from a prediction of 5.6%.
Inflation is now expected to average 3.3% this year, up from a previous forecast of 3.2%, making it the joint second-highest rate among the G7 nations. It is predicted to slow to 2.8% next year, but that is significantly higher than the 2.4% rate previously forecast.
Warning on unfunded measures
The IMF warned governments against unfunded giveaways ahead of this month's Budget, when Chancellor John Healey is expected to announce targeted help for cash-strapped households. It said it was urgent for governments worldwide to reduce borrowing and stressed that help for households with cost-of-living pressures should be used "sparingly".
Prime Minister Andy Burnham has already temporarily removed the 5% VAT on domestic electricity bills, but the £45 average annual saving is small compared with a threatened 16% spike in prices in January, caused by the ongoing US-Iran war.
Options for targeted support
One option for the Chancellor is to extend the VAT cut beyond next April, although campaigners say there should be a more targeted approach. That could come in the form of widening the criteria for the Warm Home Discount, a government-backed scheme that offers a £150 reduction off electricity bills for the winter period between October and March.
The scheme is available to those who get Pension Credit or Universal Credit but could be extended to all those on means-tested benefits. Think tank the Resolution Foundation says a new temporary scheme targeted at those with an income below £24,000 would extend beyond benefit recipients and save eligible households £175 on average.
Most recent figures from the Office for National Statistics showed that inflation increased to 3.1% in August and is expected to jump to 3.3% when figures for September are released. New figures from Worldpanel revealed that grocery price inflation rose to 2.5% over the four weeks to October 4, up from 2.3% last month. A survey alongside it found that more than half of shoppers say they are very or extremely concerned about rising fuel prices.
Mr Healey said: "Conflict in the Middle East and Europe is hitting people in the UK and around the world. But Britain's economy is showing strong international resilience in the face of these challenges: we're forecast to be the joint second fastest-growing G7 nation in 2026 and have the lowest deficit in the G7 by 2031.
"This week I will meet international finance ministers in Bangkok to discuss how we limit the impact of the conflicts on people and businesses, while maintaining strong fiscal discipline. We are determined to drive good growth in every postcode, provide some breathing space for today, and fresh hope for the future."
Asked what advice the IMF had for the UK, economic counsellor Silvana Tenreyro said: "The message for the UK is just simply stay the course and continue on that trajectory."
Shadow chancellor Andrew Griffith said: "John Healey must tackle both problems in the Budget by getting Britain drilling and dealing with out of control welfare spending. If the Chancellor reaches for more tax rises instead, he is choosing slower growth and working people will pay for it."
