The International Monetary Fund (IMF) has upgraded its projection for UK growth this year by 0.4% to 1.1% – the largest upward revision for any advanced economy.
In a boost to Chancellor Rachel Reeves as she prepares to travel to Washington for the IMF’s annual meeting this week, its latest world economic outlook predicts strengthening growth as “falling inflation and interest rates” stimulate demand.
The IMF’s improved view of UK performance is a significant increase on its July projection of 0.7% growth this year, and up by 0.6% from its April assessment.
Its projection of 1.5% of GDP growth in 2025 remains unchanged.
Responding to the announcement Ms Reeves, said: “It’s welcome that the IMF has upgraded our growth forecast for this year, but I know there is more work to do. That is why the budget next week will be about fixing the foundations to deliver change, so we can protect working people, fix the NHS and rebuild Britain.”
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The US economy meanwhile is projected to have grown by 2.5% this year, an increase of 0.2% on the July projection, before falling back to 2.2% in 2025.
By contrast, the Euro area is projected to grow by just 0.8% this year, down 0.1%, rising to 1.1% next year, a downgrade of 0.3%.
The IMF’s more optimistic view of the UK economy comes after official figures in the last fortnight showed a return to growth in August following two months of stagnation, and a dip in inflation below the Bank of England‘s target of 2% last month for the first time in three-and-a-half years.
Ms Reeves’s visit to Washington comes a week before she delivers her first budget, a crucial moment for her stewardship of the economy and the new Labour government.
A critical time for the chancellor
The chancellor is understood to be aiming to generate around £40bn in tax rises and spending cuts in order to deliver some targeted public spending increases and build some headroom into forecasts for the coming years.
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She is also expected to change the calculation of government debt to allow her to increase borrowing for investment in infrastructure projects.
Many of the issues with which she is grappling domestically are mirrored in those identified by the IMF in its latest assessment of the global economy.
Global problems
The report’s authors conclude that the “global battle against inflation has largely been won”, with average global rates due to settle at 3.5% next year, lower than the average between 2000 and 2019.
Having proved “unusually resilient” in avoiding recession as inflation fell from its near double-digit peak, they say the global economy now faces the challenge of improving growth prospects while simultaneously stabilising debt levels and “rebuilding much-needed fiscal buffers”.
The IMF identifies a range of challenges including regional conflicts including those in the Middle East and Ukraine; the need to loosen monetary restraint while tightening fiscal policy; a potential slowdown in China; and the associated risk of protectionism and trade wars, with the threat of tariffs imposed by the US and Europe on Chinese goods.
Warning to ‘stabilise debt’
In a warning that may be noted in the Treasury and No 11, the IMF says that after years of elevated borrowing in response to the pandemic and post-COVID economic adjustment, governments need to stabilise debt and “rebuild much-needed fiscal buffers”.
This has to be done gradually and credibly to retain the confidence of markets and enable states to continue to borrow at affordable rates.