Overview: UK poised for modest growth in a volatile global climate
The United Kingdom is forecast to be the second-fastest growing economy among the world’s leading advanced economies, the IMF said in its latest World Economic Outlook. Growth is projected at about 1.3% for both 2025 and 2026, a pace that outstrips most G7 peers aside from the United States. The forecast comes as the global economy navigates trade frictions, currency shifts, and geopolitical tensions that have unsettled markets and investment.
What the IMF forecast means for the UK
The IMF’s update places the UK ahead of Germany, France, and Italy in terms of growth for the near term, with Canada and Japan also projected to lag behind in the same period. The improvement for the UK is linked to a stronger start to 2025, improved trade prospects, and the impact of a recently announced US-UK trade deal, which the IMF said supported a brighter export outlook.
As Chancellor of the Exchequer, Rachel Reeves welcomed the upgrade, framing it as a signal that economic policy can build momentum. “But know this is just the start. For too many people, our economy feels stuck,” she said, emphasizing that growth must translate into higher living standards for working people.
Inflation trajectory: a temporary rise amid longer-term easing
Despite brighter growth prospects, the IMF projects higher inflation ahead, with the UK expected to experience the strongest inflation among the G7 in 2025 and 2026. Average inflation is forecast at about 3.4% in 2025 and 2.5% in 2026, before easing to near 2% by the end of next year. The uptick is attributed to elevated energy and utility bills, a factor the IMF considers temporary as price pressures unwind over time.
The inflation outlook has become a focal point of political debate. Shadow chancellor Sir Mel Stride described the IMF’s forecast as “grim reading,” arguing that households are being squeezed and that economic policy since the new government has allowed the cost of living to rise and business confidence to falter. The government argues that the resilience of the economy will ultimately help households through the inflationary period.
External factors and the trade backdrop
The IMF’s assessment notes that the UK’s upgrade is partly due to a stronger-than-expected performance in the first half of 2025 and a better trade outlook. The deal struck with the US is cited as a contributing factor to this more favourable external environment. However, the overall global outlook remains fragile. Tariffs and shifts in the dollar have created a mixed operating environment for exporters and manufacturers alike, with price transmission uneven across sectors.
The IMF also highlights the broader economic impact of Brexit-related uncertainty. Historical precedent suggests that major changes in trading arrangements can dampen investment, even if immediate effects appear contained. Analysts say the UK’s performance will depend on how quickly investment responds to policy clarity and post-Brexit trade arrangements.
Longer-term implications for policy and households
Looking ahead, policy focus is likely to center on balancing growth with affordability. The IMF’s framework implies that a resilient economy can weather inflationary pressures if wage growth and productivity rise in tandem. For households, the key question is whether rising energy costs and living expenses will be offset by higher real incomes and improved job security as the economy stabilizes.
The IMF’s World Economic Outlook notes that while resilience remains strong in some areas, warning signs—such as elevated costs for consumers—persist and warrant careful policy calibration. The UK’s ability to convert nominal growth into meaningful improvements in real living standards will be a critical test for policymakers in the coming years.
Conclusion: navigating a turning tide
In sum, the IMF’s forecast positions the UK as a relative standout among the G7, with 1.3% growth in 2025 and 2026, against a backdrop of anticipated inflation that should cool over time. How this translates into everyday life for households will depend on the pace of wage growth, energy price movements, and the practical execution of post-Brexit trade opportunities. The forecast underscores both opportunity and risk as the UK seeks to convert modest growth into enduring economic momentum.
