The UK economy is now expected to grow by 1.3% in 2026, an increase from the 1% predicted in July, according to the International Monetary Fund (IMF). However, the organisation's latest report warns that higher energy prices and interest rates are likely to slow growth in 2027.
The IMF projects that growth will decrease to 1.2% in 2027, as long-term interest rates and energy prices weigh on household spending and business investment. Despite this, the UK is estimated to have the second fastest growing economy in the G7, alongside Germany, following a reversal of earlier forecast downgrades.
Chancellor John Healey is currently preparing the first Budget under Prime Minister Andy Burnham's government, which is scheduled to be announced on 28 October. Healey stated that the government aims to "provide some breathing space" for households in the upcoming Budget. The IMF also projected a sharp fall in UK borrowing, anticipating the lowest annual rate of borrowing among G7 countries over the next five years.
Inflation is expected to average 3.3% this year and remain above the Bank of England's 2% target in 2027 at 2.8%, according to the IMF. The Bank of England itself has predicted inflation could rise above 4% early next year, potentially leading to further interest rate increases.