The International Monetary Fund raised its growth forecast for the UK economy to 1.3% in 2026, up from a July prediction of 1% earlier this year. The IMF twice yearly updates its economic forecasts for countries worldwide, though these assessments can prove incorrect and should not be treated as certain.

The upgrade reflects stronger-than-expected global economic performance, driven partly by surging investment in artificial intelligence. However, the IMF slightly downgraded its 2025 forecast, citing disruption to Middle Eastern energy transport and production from the US-Israel war with Iran, which has pushed oil prices higher and lifted inflation.

The UK economy benefits from this revised outlook. The IMF expects the UK to have the second-fastest growing economy in the G7 this year alongside Germany. Central banks, including the Bank of England, are expected to raise interest rates in coming months to counter inflationary pressure. The IMF forecasts UK inflation will average 3.3% this year and raised its 2025 estimate to 2.8% from a prior prediction of 2.4%. Tim Armitage, investment strategist at Quilter Cheviot, predicted at least one rate rise this year with more expected next year.

Beyond growth, the IMF highlighted the UK's fiscal position. It said the UK "basically stands out, along with India" among major economies for addressing government borrowing concerns. By 2031, the UK is projected to have the lowest annual borrowing of the G7, which includes Canada, France, Germany, Italy, Japan and the US. Sir Howard Davies, former deputy governor of the Bank of England, attributed this partly to the UK government's majority status and commitment to tackle the deficit through tax rises, public service cuts or both. By contrast, Davies noted the US has said little about reducing its deficit, while France and Germany lack majority governments.

Davies cautioned against reading too much into these comparisons. "We're still growing slowly. It's almost like saying we're winning a slow bicycle race here because other people are going backwards a bit more rapidly than we are," he said.

The IMF predicts higher energy prices and elevated interest rates will weigh on consumer spending and business investment next year. Households face continued pressure from rising prices as inflation persists.