IMF forecasts 1.2% UK growth in 2025 but cautions Chancellor Reeves to maintain fiscal discipline

The International Monetary Fund (IMF) has revised its UK growth forecast upwards, predicting the economy will expand by 1.2% in 2025 and 1.4% in 2026. This is a slight improvement on its previous estimate of 1.1% growth for this year, signalling that the UK’s economic recovery is gaining momentum following a strong first quarter.

Luc Eyraud, the IMF’s UK mission chief, described growth in the opening months of the year as “very strong,” driven by higher consumer spending and increased business investment. However, he cautioned that recent developments, including US import tariffs and rises in employer taxes, could weigh on growth in the months ahead.

Despite the improved outlook, the IMF issued a firm warning to Chancellor Rachel Reeves to adhere strictly to her government’s fiscal rules on tax and spending. These self-imposed rules require that day-to-day government spending be funded by tax revenue rather than borrowing, and that national debt falls as a proportion of the economy by the end of this parliamentary term in 2029/30.

The IMF praised the UK government’s planning reforms and infrastructure investment plans, suggesting that these could significantly boost growth if implemented effectively. But it also highlighted a range of risks, including ongoing global uncertainties, volatile financial markets, and the challenge of managing day-to-day spending. These factors will make it difficult for the Chancellor to balance taxation and spending decisions in the long run.

One notable suggestion from the IMF was to reduce the frequency with which the Office for Budget Responsibility (OBR) assesses the UK’s public finances, recommending a cut from twice yearly to once annually. While fiscal rules are designed to maintain government credibility with financial markets, the government has repeatedly insisted that these rules are “non-negotiable.”

The IMF’s report also flagged global trade tensions as a potential drag on growth in 2026. Trade activity among the UK’s partners is expected to slow due to factors such as US tariffs and ongoing uncertainty in the global economy. The IMF estimates these issues will reduce UK growth by 0.3 percentage points next year.

Nevertheless, the IMF welcomed the UK’s recent trade agreements with major partners including the EU, India, and the US. It noted these deals reflect the government’s efforts to create a more predictable trading environment for UK exporters, which could help sustain economic momentum.

Chancellor Reeves welcomed the report, emphasising that the government’s trade deals were “protecting jobs, boosting investment and cutting prices.” However, opposition figures remained critical. Shadow Chancellor Mel Stride accused Reeves of having “already fiddled her fiscal targets to allow her to borrow hundreds of billions more” during this parliament and warned that further changes could undermine market confidence.

The IMF’s updated forecast comes shortly after it lowered its UK growth expectations due to rising borrowing costs, trade tensions, and inflationary pressures. While it anticipates inflation slowing to around 2.2% by 2026—close to the Bank of England’s 2% target—recent official data showed inflation unexpectedly increased to 3.5% in April, up from 2.6% in March. The IMF expects inflation to remain elevated until later this year before easing back toward target by 2026.

Overall, while the IMF acknowledges signs of recovery, it stresses that the Chancellor faces tough choices ahead in managing the UK’s fiscal health amid a challenging global backdrop