Growth is then projected to ease to 1. 2% in 2027 as higher energy prices and long-term interest rates weigh on household spending and business investment.
The upgrade places the UK alongside Germany as one of the fastest-growing economies in the G7, although the outlook remains vulnerable to the economic effects of the conflicts in the Middle East and Europe. The IMF said the global economy had absorbed the energy shock better than expected, but warned that the consequences of the conflict remained highly uncertain.
Inflation is forecast to average 3. 3% in 2026 and 2. 8% in 2027, remaining above the Bank of England’s 2% target. The central bank has warned that inflation could rise above 4% early next year, increasing pressure for interest rates to rise.
The forecast arrives as Chancellor John Healey prepares the government’s tax and spending plans for 28 October. He said the government would seek to provide households with some breathing space as wars and higher prices continue to affect people in the UK and elsewhere.
The IMF urged the government to maintain its deficit-reduction plans. It said the UK had already begun fiscal consolidation and stood out among major economies for setting a clear path to lower borrowing. Annual borrowing is projected to fall by nearly four percentage points of GDP between 2025 and 2031, leaving the UK with the lowest borrowing rate in the G7 by 2031 under the IMF’s projections.
That fiscal position is under pressure from higher debt-interest costs, defence commitments and possible energy support. Economists have estimated that Healey may need to find £35bn to avoid public-service cuts while meeting defence promises. The Resolution Foundation said reducing borrowing should be combined with targeted help for families struggling to heat their homes.
The chancellor’s room for manoeuvre has also been welcomed cautiously. Maike Currie of PensionBee said the stronger forecast offered some breathing space but did not mean families were already better off. Conservative shadow chancellor Andrew Griffith warned that further tax rises would slow growth and leave working people to pay the cost.
The IMF’s latest assessment also says the UK’s energy-shock response should remain temporary, targeted and budget-neutral. Its earlier country assessment identified the country’s reliance on natural gas, limited domestic storage and sensitivity to global borrowing costs as reasons higher energy prices could reduce disposable incomes and increase production costs. The government’s next budget will set out how it intends to balance those pressures with its borrowing and spending commitments.