IMF forecasts UK economy growth amidst rising inflation and global uncertainties

In May 2025, the International Monetary Fund (IMF) released its annual health-check on the UK economy, highlighting a slight upgrade in its growth forecast for 2025, predicting an increase of 1.2%. This upgrade was particularly noteworthy given that just a month prior, the IMF had revised its expectations downward from 1.6% to 1.1%. The report indicates that the UK economy has shown signs of recovery fueled by improved consumer spending and business investments that occurred in the first three months of this year; however, these favorable figures registered before the US imposed import tariffs and an increase in UK employer taxes that took effect in April. Luc Eyraud, the IMF's UK mission chief, acknowledged the strong economic performance at the start of the year but cautioned that the growth forecast for 2026 might face headwinds due to ongoing global trade tensions. Specifically, the report identified external factors such as economic slowdown among UK's trading partners, escalating trade disputes, and persistent uncertainty driven by US policy decisions, noting that these could decrease growth expectations by approximately 0.3% by 2026. Additionally, the IMF also assessed the government's efforts in planning reforms and infrastructure investments, suggesting these initiatives could enhance growth if effectively carried out. Despite the positive note on initial growth forecasts, Eyraud underscored the looming challenges that Chancellor Rachel Reeves will face, including a need for judicious management of fiscal policies. The IMF urged the Chancellor to adhere to fiscal rules focusing on balancing taxation and spending, as the government has maintained that these regulations are non-negotiable. The Chancellor has committed to ensuring that day-to-day government expenses are funded by tax income rather than accruing debt. The report also addressed rising inflation in the UK, which was unexpectedly recorded at 3.5% in April, up from 2.6% in March, highlighting an economic environment that could complicate recovery efforts. The IMF projected that UK inflation may eventually taper down to 2.2% by 2026, aligning closer to the Bank of England's target. However, this anticipated decline in inflation is only expected to occur later in 2026, indicating a more complex recovery road ahead for the UK economy.