UK growth upgraded but energy prices and rates to bite in 2027

The International Monetary Fund upgraded its UK growth forecast to 1.3% for 2026, up from its July prediction of 1%, citing greater-than-expected global resilience to energy price shocks from the US-Iran war. The IMF warned that economic fallout from the conflict remains "highly uncertain" but said the world economy has shown a "remarkable capacity to absorb shocks."

Growth will slow to 1.2% in 2027 as higher energy prices and long-term interest rates weigh on household spending and business investment, the IMF projected. Inflation is expected to average 3.3% this year and remain above the Bank of England's 2% target at 2.8% in 2027. The Bank of England has predicted inflation could rise above 4% at the start of next year, making interest rate rises more likely.

The IMF highlighted the UK's fiscal position as a bright spot. IMF Chief Economist Silvana Tenreyro said the UK "stands out" among G7 nations for already beginning its debt consolidation process. The organisation projects the UK will reduce its annual borrowing by nearly four percentage points of GDP from 2025 to 2031, significantly more than other G7 members, many of which are increasing their deficit. The UK is on course to have the lowest annual borrowing in the G7 by 2031 and the longest maturity of debt, which locks in lower rates for longer.

Chancellor John Healey said the government would seek to "provide some breathing space" for households in the Budget announcement scheduled for 28 October. Government borrowing costs have surged recently, placing pressure on Healey to demonstrate credible fiscal plans to financial markets that the UK depends on for borrowing.

Economists have suggested Healey faces finding £35bn to avoid public spending cuts while meeting defence pledges in his first Budget. The Resolution Foundation called on him to make "repairs" to public finances while providing targeted support for those struggling to heat their homes during winter. Conservative shadow chancellor Andrew Griffith warned that tax rises would lead to slower growth.

Despite the forecast upgrade, the IMF cautioned that households will continue feeling inflation's squeeze. With inflation expected to stay elevated, particularly in 2027, real incomes will face continued pressure even as the economy expands.