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

The International Monetary Fund has upgraded its UK growth forecast to 1.3% for 2026, up from 1% predicted in July, but warned that higher energy prices and interest rates will slow expansion to 1.2% in 2027.

The IMF's World Economic Outlook, released on Tuesday, said the UK economy has proved more resilient to the energy shock caused by the US-Iran war than initially expected. However, the organisation cautioned that "the economic fallout from the conflict remained highly uncertain".

Chancellor John Healey said the government would look to "provide some breathing space" for households in the Budget, to be announced on 28 October. Healey is under pressure to balance cost-of-living support with fiscal credibility. Economists have suggested he faces finding £35bn to avoid public spending cuts while meeting defence commitments.

The IMF highlighted the UK's debt management as a standout performance among major economies. IMF Chief Economist Silvana Tenreyro told BBC News that the UK "basically stands out, along with India" in beginning the consolidation process. The organisation projects the UK will reduce annual borrowing by nearly four percentage points of GDP between 2025 and 2031, more than any other G7 member. The UK is also on course to have the lowest annual borrowing in the G7 by 2031, with the longest maturity of debt, locking in lower rates longer.

Tenreyro said the UK should "stay the course" with its deficit reduction strategy.

The upgrade means the UK is now expected to have the second-fastest growing economy in the G7 alongside Germany, reversing downgrades made at the start of the US-Iran war.

However, household finances will remain strained. The IMF expects inflation to average 3.3% this year and remain above the Bank of England's 2% target at 2.8% in 2027. The Bank itself has predicted inflation could exceed 4% early next year, making interest rate rises more likely.

The Resolution Foundation called on Healey to make "repairs" to public finances while providing targeted support for households facing a difficult winter. Conservative shadow chancellor Andrew Griffith warned that further tax rises would mean "slower growth and working people will pay for it".

Healey is expected to meet other finance ministers at the IMF's annual meeting in Bangkok on Tuesday to discuss limiting economic damage from Middle East and European conflicts.