UK growth forecast upgraded by IMF but risks remain

The International Monetary Fund (IMF) has upgraded its forecast for the UK's growth this year, but warned the Iran war. "domestic uncertainty" could hit the economy.

The growth estimate has been upgraded to 1% from 0.8% for 2026 by the influential body. which said last month that theUK would be hit hardest by the Iran war among the world's advanced economies.

In its latest forecast, it said the UK "remained resilient" but added a prolonged conflict in the Middle East risked hitting growth. resulting in "higher energy and food prices".

"Domestic uncertainty could also add to the already volatile global environment, holding back consumption and investment decisions," it added.

The upgrade comes after figures released last week showed the economygrew by 0.6% in the first three months of the year,led by a rebound in areas such as retailing. construction.

The IMF said the UK economy had entered the latest global shock with "more momentum than expected".

It said inflation, which is the rate prices rise at over time, would increase "temporarily" due to higher energy prices.

As the UK imports more energy than it produces domestically, it is more sensitive to rapid rises in global prices.

But the IMF suggested the Bank of England does not need to raise interest rates. which are currently at 3.75%, this year in response.

"Holding rates for the remainder of the year should be sufficient to bring inflation back to target (2%) by end-2027," it said.

The IMF did not address the political turmoil which engulfed the government last week following the poor election results for Labour,. said any "domestic uncertainty" could impact growth alongside the Iran conflict.

The upgraded growth forecast was welcomed by Chancellor Rachel Reeves. who said it was "proof" that the 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," she said.

Following calls for the Prime Minister, Sir Keir Starmer, to resign last week, Reeves had warned her fellow Labour MPs that "putting our stability at risk when signs of progress are emerging would leave families. businesses worse off".

The IMF suggested the government's commitment to its rules on borrowing. reducing the deficit - the amount it borrows in a financial year - would help protect its financial "credibility".

Luc Eyraud, the IMF's mission chief to the UK, said markets and investors put a premium on predictable government policy.

"Today's policymaking is constrained by a more volatile external environment with more frequent. overlapping shocks, a rising public interest bill, in part reflecting market concerns with countries' elevated debt, and the long-standing challenge of weak productivity growth," he said.

The government has made growing the economy its main priority in a bid to improve living standards.

When the economy is growing, businesses tend to invest more, more jobs are created. people, on average, tend to feel better off. The opposite can occur if the economy stagnates or shrinks.

The IMF said that the "long term scope" for further tax rises was "becoming limited unless fundamental tax reforms are envisaged". there were "difficult choices" over rising pressures from spending on ageing, defence and the climate transition over the next 20 years.

It suggested the "the scale of rising spending pressures. limited tax space" implied that spending "restraint" would be needed in the longer term, such as replacing the triple lock for state pensions.

But the IMF said the government's medium-term plan to reduce borrowing costs "continues to strike a good balance".

It said any household support package for higher energy prices should be targeted and time limited.

The chancellor is expected to outline some cost of living support measures later this week. including a possible cancellation of a planned 5p rise in fuel duty in September.

While the IMF's forecasts are closely watched. the figures are only a prediction, a best estimate, of what will happen in the future. Forecasts often turn out to be incorrect due to world events.