The International Monetary Fund (IMF) has modestly upgraded its growth forecast for the United Kingdom, now predicting a 1% expansion in gross domestic product (GDP) for 2026. This is an increase from the 0.8% forecast made last month following global energy shock warnings. However, the outlook remains tempered by the ongoing US-Israeli conflict with Iran, which threatens to elevate living costs and borrowing rates.
Growth Forecast Details
The IMF's latest projection is lower than the 1.3% growth anticipated in January, before the escalation of the Middle East conflict. The upgrade follows official figures showing the UK economy grew by 0.6% in the first quarter of 2026, surpassing economists' expectations and marking the strongest quarterly growth in a year. However, data indicates signs of "front loading" in March, suggesting businesses and consumers accelerated activities in anticipation of supply shortages or price increases.
Economic Challenges Ahead
Economists warn that the pace of growth is expected to stall throughout the year as the impact of the Iran war becomes more pronounced. The IMF noted that the UK has been "resilient in recent years" but cautioned that "the war in the Middle East is dampening near-term prospects." The organisation projects inflation will peak at just below 4% by the end of 2026, before easing in the second half of 2027 and returning to the 2% target by year-end.
Interest rates are expected to remain at their current level of 3.75% for the rest of the year, based on the current energy price outlook. This contrasts with some economists who predict a rate hike in 2026, as they believe the Bank of England will act to control inflation. The IMF stated: "Once the energy price shock dissipates, growth should recover in the second half of 2027."
Risks and Government Response
The IMF highlighted that the main risk to its forecasts is a "prolonged war in the Middle East, resulting in higher energy and food prices for an extended period, and sustained global market volatility, which would weigh on confidence and hurt economic activity." In response, Chancellor Rachel Reeves defended the government's strategy, saying: "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."
