UK growth upgraded but energy prices and rates to bite in 2027
The IMF report comes as final preparations are being made to the first Budget under Prime Minister Andy Burham.
UK growth forecast raised, but energy costs and interest rates set to weigh in 2027
The UK economy is expected to expand more than previously thought this year before higher energy prices and interest rates slow growth in 2027, the International Monetary Fund (IMF) has said.
In its latest report, closely followed by the government, the organisation said the UK economy would grow by 1.3% in 2026, up from the 1% forecast in July, before easing in 2027.
The IMF said economies around the world have been more resilient than expected to the energy price shock triggered by the US-Iran war, but warned that the conflict’s economic consequences remained "highly uncertain".
Chancellor John Healey said the government would aim to "provide some breathing space" for households in the Budget.
Healey is making the final preparations to Andy Burnham's new-look government's tax and spending plans, due to be announced on 28 October.
Government borrowing costs have climbed sharply, increasing pressure on the chancellor to make sure his plans are seen as credible by financial markets, which the UK depends on to borrow money.
However, in its economic outlook, the IMF said the UK was projected to see a steep drop in borrowing and the lowest annual borrowing rate of all G7 countries - the group of the world's most advanced economies - over the next five years.
The UK is also expected to have the lowest annual deficit - the gap between what the government spends and what it raises through taxes in a year - by 2031, indicating the IMF believes public spending will be reduced in the years ahead.
The IMF chief has previously urged the world's advanced economies to reduce borrowing and lower debt levels.
The reversal of downgrades to economic forecasts made at the start of the US-Iran, mean the UK is expected to have the second fasted growing economy in the G7 along with Germany.
Growth is still forecast to slow to 1.2% in 2027 as higher energy prices and long-term interest rates weigh on household spending and business investment.
Healey said wars in the Middle East and Europe were "hitting people in the UK and around the world", but added that "Britain's economy is showing strong international resilience".
Economists have said Healey may need to find £35bn to avoid cuts to public spending while meeting defence promises in his first Budget.
On Tuesday, the Resolution Foundation urged the chancellor to "make repairs" to the public finances, while saying well-targeted support was needed for people "struggling to heat their homes".
"The challenge of continuing to bring down borrowing must be paired with the pressing need for fresh cost of living support to help families facing a difficult winter ahead," the think tank said.
Andrew Griffith, Conservative shadow chancellor, said that if Healey "reaches for more tax rises" in his Budget, "he is choosing slower growth and working people will pay for it".
Burnham has promised to create "good growth in every postcode" as part of his plans to give nations and regions more control, though his strategy has drawn criticism within his own party.
The IMF said households are likely to keep feeling the strain of rising prices, with inflation expected to average 3.3% this year and stay above the Bank of England's 2% target in 2027 at 2.8%.
The Bank itself has forecast inflation could climb above 4% at the start of next year - making an interest rate rise more likely.
Healey is expected to meet other finance ministers at the IMF's annual meeting in Bangkok, Thailand, on Tuesday to discuss how the economic impact of the Middle East and European conflicts could be limited.
The IMF said the global economy had shown a "remarkable capacity to absorb shocks" not only from the current Middle East conflict, but also from the Covid pandemic and Russia's invasion of Ukraine.