IMF gives Britain a better grade — and a harder winter

IMF gives Britain a better grade — and a harder winter

Growth upgraded, but 2027 will be slower

The IMF's World Economic Outlook, published on 13 October at its annual meetings in Bangkok, nudged this year's UK growth forecast up to 1.3%, from 1% in July, while trimming next year to 1.2% from 1.3%. That leaves Britain the joint second-fastest growing economy in the G7 this year, alongside Germany and behind only the United States. The labour market also held up better than the Fund expected: unemployment is now seen averaging 5.3% this year rather than the 5.6% it pencilled in earlier.

The world is coping better than expected

The upgrade is not a purely British story. The IMF said the global economy has proved more resilient to the energy price shock triggered by the US-Iran war than anyone anticipated, helped substantially by the surge of investment into artificial intelligence, and it lifted its global growth forecast to 3.1% this year and 3.4% next. Britain's heavy concentration of white-collar, professional services means it can adopt AI — and capture its productivity lift — faster than many peers. Still, the Fund called the economic fallout from the conflict "highly uncertain". Economic counsellor Silvana Tenreyro, a former Bank of England Monetary Policy Committee member, put it bluntly: the global economy "has been resilient, but that resilience is reaching its limits", and policymakers should "move from just coping, to rebuilding".

Britain leads the G7 on deficit reduction

This is the headline the Treasury will quote. The IMF said the UK "basically stands out, along with India" in tackling public borrowing. It projects annual borrowing to fall by nearly four percentage points of GDP between 2025 and 2031 — a bigger reduction than any other G7 country — leaving Britain with the lowest deficit in the group by 2031, at roughly 1.4% of GDP against about 8.4% for the United States. The UK also has the longest debt maturity in the G7, locking in lower rates for longer. Tenreyro's advice to the Chancellor was simply to "stay the course". Sir Howard Davies, former deputy governor of the Bank of England, attributed the progress to a majority government committed to fixing the problem.

Inflation stays higher for longer

Households get the bad news. The IMF raised its UK inflation forecast for this year to 3.3% from 3.2%, and for 2027 to 2.8% from 2.4% — the joint second-highest rate in the G7, and comfortably above the Bank of England's 2% target. Core inflation is now expected to return to target only late next year. The Bank itself expects inflation to climb to slightly above 4% in the first four months of 2027, partly because the household energy price cap rises again in January. With price pressures building, markets widely expect the Bank to raise rates at its November meeting, echoing the Federal Reserve, the European Central Bank and the Bank of Japan.

Borrowing costs sit at their highest since 1998

The bond market has already priced the squeeze. On 7 October, the 30-year gilt yield peaked at 6.036%, its highest since January 1998, while the 10-year reached 5.515%, the highest since July 2007. Higher long-term rates feed straight into mortgage costs, corporate investment and the government's own debt interest — which is exactly how the IMF's 1.2% forecast for 2027 is expected to materialise, as dearer energy and dearer money weigh on consumption and investment.

The Budget is where the advice gets tested

Chancellor John Healey and Prime Minister Andy Burnham face their first Budget on 28 October, under pressure to ease the cost of living before energy bills jump in January. The government has already temporarily removed the 5% VAT on domestic electricity, saving a household about £45 a year — small next to the roughly 16% increase threatened in January. The IMF's guidance was pointed: support for households and businesses should be used "sparingly" and should not "complicate the task of monetary policy". Healey promised to give families "breathing space". Not everyone is convinced the outlook is bright: Valentin Boboc of the Institute of Economic Affairs said the longer-term picture remains disappointing because of high taxes and expensive energy, and that "Britain cannot tax its way to prosperity". The Budget, followed by the Bank's rate decision in November, will show whether "stay the course" survives contact with politics.