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British economic growth will accelerate this year and next as falling inflation and lower interest rates strengthen domestic demand, the International Monetary Fund said, as Prime Minister Rachel Reeves prepares to deliver her first budget next week.
The economy will grow 1.1% this year, a 0.4 percentage point upgrade from its previous forecast, the fund said Tuesday.
Growth will rise further to 1.5% in 2025, the third highest forecast among the G7 group of advanced economies, the fund added in its latest global economic outlook.
Pierre-Olivier Gourinchas, the IMF’s chief economist, told the Financial Times that improving inflation would allow the Bank of England to cut interest rates more quickly to further stimulate the economy.
But he warned before the IMF report was released that it would be difficult for Reeves to curb public debt while maintaining economic growth.
“Difficult choices will have to be made,” Gourinchas said in an interview. “We need to reduce debt. . . The question is how to do that in a way that doesn’t stifle growth.”
Reeves previously claimed the Labor government inherited “the worst situation since the Second World War” when it came to power last July, a claim strongly denied by the Conservatives.
Despite the IMF’s more optimistic assessment, Reeves’ allies have warned she is unlikely to be able to alleviate the need for big tax increases in the October 30 budget, which seeks to plug a funding gap of around £40 billion.
“We welcome the IMF’s upward revision to its growth forecast for this year, but we know there is more work to be done,” Reeves said.
“This is what next State’s budget is about – fixing the foundations to deliver change. This will help us protect workers, fix our NHS and rebuild Britain,” she added.
Tuesday’s change beats the IMF’s forecast, which was better than the Office for Budget Responsibility’s public assessment in March, which forecast growth of 0.8% this year.
However, the UK’s fiscal watchdog’s growth forecast for next year is 1.9%, which is more optimistic than the IMF’s latest forecast.
The OBR is also more optimistic than many analysts about Britain’s productivity and growth potential in the future, dampening hopes for an economic upgrade in next week’s budget.
The OBR submitted its latest pre-budget forecasts to Reeves on Tuesday.
The IMF said fiscal consolidation globally was “urgent,” especially given central banks were lowering interest rates to ease pressure on the economy.
But it could also benefit the “private sector crowd”, he said, urging countries to increase investment in the green transition and infrastructure.
Gourinchas said some of the UK government’s policies, such as proposals to speed up planning permission for infrastructure and construction projects, aligned well with the fund’s recommendations at its routine health check in July.
But a full assessment of the government’s economic plans must follow the details of the budget, he added.
The UK economy, which grew barely 0.3% last year, began to recover in the first half of 2024 as household spending firmed up.
Wages have now outperformed inflation for 15 consecutive months, helping to reverse the contraction in 2022 and 2023 and support spending.
Despite forecasts that the UK will become the third-fastest growing economy in the G7 by 2025, the fund predicts it will not lag behind Canada and the US, which are expected to grow well above 2%.
Inflation will remain slightly higher than most other G7 countries at 2.1% next year, the highest in the group alongside Italy.
But Gourinchas said the latest data, particularly on services inflation, was encouraging, helping to bring headline inflation down to 1.7% in September and below the BoE’s 2% target for the first time in more than three years.
BoE policymakers are widely expected to vote on a new quarter-point rate cut in November after lowering the key rate to 5% in August.
The IMF’s basic forecast is for one additional interest rate cut this year and four more in 2025. But Gourinchas said the BoE’s monetary policy committee could potentially become “a little more aggressive”, echoing recent comments from BoE Governor Andrew Bailey.
