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Friday, Sep 05, 2025

IMF dramatically upgrades outlook for UK economy - but says more cost of living pain to come

IMF dramatically upgrades outlook for UK economy - but says more cost of living pain to come

Germany's "near zero" growth rate forecast means Britain is no longer the laggard of the group but sounded a note of caution over the future impact of increased interest rates.
Britain is no longer expected to suffer a recession this year, nor will it have the weakest economic growth in the group of seven leading industrialised economies, the International Monetary Fund (IMF) said today.

Unveiling a dramatic upgrade to its outlook for Britain, the Fund, which previously predicted Britain would face the worst 2023 of any G7 nation, said that in fact the UK would grow by 0.4% this year.

While this remains weak, it is nonetheless stronger than the 0.7% contraction previously forecast and stronger than the "near zero" growth rate the IMF has pencilled in for Germany.

The news, contained in the IMF's latest individual assessment of the UK economy, its so-called Article IV report, will likely be welcomed by the chancellor, following a stream of negative forecasts from major institutions.

However, the Fund said that the impact of the cost of living crisis will continue to cause pain across the economy.

"Given transmission lags," it said, "sizeable rate [interest rate] hikes implemented since August are expected to have their peak impact on demand and inflation from the second half of 2023."

It added that interest rates - already at 4.5% having risen twelve successive times since late 2021 - would have to rise even further.

"Inflation is projected to return to the 2% target only by mid-2025, six-months later than in staff's April forecast, and risks to this trajectory are tilted to the upside.

"Accordingly, some further monetary tightening will likely be needed, and rates may have to remain high for longer to bring down inflation more assuredly."

Chancellor Jeremy Hunt said: "Today's IMF report shows a big upgrade to the UK's growth forecast and credits our action to restore stability and tame inflation.

"It praises our childcare reforms, the Windsor Framework and business investment incentives.

"If we stick to the plan, the IMF confirm our long-term growth prospects are stronger than in Germany, France and Italy... but the job is not done yet."

Despite volatile times for the global economy, the latest assessment casts further doubt on the fund's forecasting record.

At a news conference to explain its findings, IMF Kristalina Georgieva said: "When you take a good look at the projections done by the Bank of England, consensus projections and the IMF, we're actually slightly less pessimistic than the others have been.

We have gone through a very turbulent time over the last years. We have experienced shock upon shock upon shock and that has created exceptional uncertainty. I actually think our staff , my colleagues, deserve credit for being agile in how we look at changing conditions and being fast to adjust projections so we can give as clearer picture as we can at the time, that you would agree is the foggiest we have seen in many decades."
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