IMF upgrades UK growth forecast, urges Healey to stay course on deficit

UK 2027 forecast cut to 1.2% as energy prices weigh on outlook

The International Monetary Fund lifted its UK growth forecast for 2026 to 1.3%, an increase of 0.3 percentage points from its July update, in the World Economic Outlook (WEO) released at the fund’s annual meetings in Bangkok. The upgrade follows stronger-than-expected UK performance in early 2026: GDP growth was recorded at 0.6% in the first quarter and 0.5% in the second, and the Office for National Statistics pointed to the strong expansion of AI-related businesses as one factor behind the upside surprise.

At the same time, the fund trimmed its 2027 forecast modestly to 1.2%, from 1.3% previously, warning that growth was likely to “edge down” as higher energy prices and long-term interest rates weigh on consumption and investment. The downgrade comes amid a broader repricing of inflation and rate expectations across major economies following the summer’s re-escalation of conflict in the Middle East.

Silvana Tenreyro, the IMF’s economic counsellor and a former member of the Bank of England’s monetary policy committee, said that the UK “has already started a consolidation process” and urged the government not to deviate. “The message for the UK is simply, stay the course,” she said at the WEO launch. “The UK stands out,” Tenreyro added, “among G7 countries in having a plan to narrow its deficit.”

Healey, who is poised to arrive in Bangkok later this week, welcomed the upgrade but pointed to external pressures. “Conflict in the Middle East and Europe is hitting people in the UK and around the world,” he said in a statement. “But Britain’s economy is showing strong international resilience in the face of these challenges.”

The WEO warned that the global economy “could soon test the limits of resilience.” Healey is under pressure to announce an energy support package before the sharp rise in energy bills expected in January, but the fund counselled against across-the-board subsidies. Any support, the WEO said, should be “temporary, targeted and non-distortionary.”

The IMF singled out the UK, alongside Japan, as countries where core inflation — which excludes volatile commodities such as energy — is not expected to return to the Bank of England’s 2% target until late next year. Average inflation in the UK is forecast at 3.3% this year and 2.8% in 2027, a challenge for Healey and Prime Minister Andy Burnham, who have pledged to give voters a “breathing space” from rising costs.

Mortgage rates in the UK have already risen in response to higher funding costs for banks, and the Bank of England’s nine-member monetary policy committee is widely expected to raise its policy rate at its November meeting, echoing similar moves by the Federal Reserve, European Central Bank and Bank of Japan.

BoE policymaker Megan Greene, speaking to the Atlantic Council at the IMF meetings in Bangkok, argued on Tuesday morning that the IMF’s growth upgrade was proof that UK interest rates should be higher. Interest rates were currently not very restrictive, Greene added, and “there’s more recently been some labour market data that has also suggested that maybe slack in the labour market has peaked, so the labour market is loose.”

Healey is expected to spend little more than 24 hours in the Thai capital before flying home to put the finishing touches to his 28 October budget. The package is likely to focus on plans to devolve more tax revenues to mayoralties alongside measures to help households with higher energy bills before the winter.

A string of other challenging decisions, including when the UK should be aiming to spend 3% of GDP on defence, is expected to be delayed until a big spending review at some point next year.

The Institute for Fiscal Studies warned this week that the budget would be a “work of fiction” unless Healey set out how he would address £35bn in future spending pressures the think tank identified.