UK Economic Growth Upgraded, But Energy Costs and Interest Rates Pose 2027 Headwinds

Highlights

• The International Monetary Fund (IMF) now projects the UK economy to expand by 1.3% in 2026, an increase from its 1% estimate in July.
• The UK is identified as one of the few major economies on track to stabilize its national debt levels.
• Growth is anticipated to decelerate to 1.2% in 2027, primarily due to elevated energy costs and persistent high interest rates.
• Inflation is expected to average 3.3% this year, and to stay at 2.8% in 2027, exceeding the Bank of England's 2% target.

Details

According to the IMF's latest report, global economies have demonstrated greater resilience than expected to the energy price shock stemming from the US-Iran conflict. However, the organization cautioned that the full economic repercussions of the conflict remain "highly uncertain." Chancellor John Healey indicated that the government's upcoming Budget, set for October 28, will aim to offer some relief to households.

Silvana Tenreyro, the IMF's chief economist, highlighted the UK's leadership among G7 nations in managing its debt. The IMF forecasts that the UK will reduce its yearly borrowing by almost four percentage points of GDP between 2025 and 2031. This reduction is considerably greater than that of other G7 members, many of whom are increasing their deficits during the same period. The UK is also predicted to have the lowest annual borrowing within the G7 by 2031 and the longest debt maturity, securing lower rates for an extended duration.

Why it matters

This report offers a crucial perspective for the UK government's fiscal strategy. While the improved growth outlook is positive, the anticipated slowdown in 2027 and ongoing inflationary pressures heighten the significance of Chancellor Healey's budget plans. Providing support for the cost of living for households and businesses will likely remain a key priority for the government in the coming period.