UK growth outlook raised as IMF warns political turmoil could weigh on economy

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UK growth outlook and IMF warning

Highlights

IMF upgrades UK 2024 GDP growth forecast to 1.0% from 0.8%, citing stronger data but warns Middle East conflict weighs on outlook.
Benchmark UK 10-year borrowing costs hit highest level since 2008 as political uncertainty and speculation over Starmer's future intensify market pressure.
IMF projects UK inflation rising to just under 4% by year-end but expects a return to 2% target by end-2027 without more rate hikes, barring energy or wage shocks.

IMF outlook and policy risks

As reported by Reuters, Britain's economy is expected to grow by 1.0% this year, up from a 0.8% forecast published last month. The Fund says the upgrade reflects stronger-than-expected recent growth, revisions to earlier data and pre-war economic momentum, even as the war in the Middle East weakens the near-term outlook.

The IMF says inflation is likely to rise to just under 4% by the end of the year, but the Bank of England should still be able to bring it back to its 2% target by the end of 2027 without raising interest rates, assuming energy prices fall as markets expect. At the same time, it warns that uncertainty linked to the Iran conflict could force the BoE to either cut or raise rates, and says policymakers should be ready to respond forcefully if pay demands and price increases prove more persistent.

The Fund also says any energy subsidies should be temporary and targeted, and financed through tax rises or spending cuts rather than additional borrowing. It adds that the government should stay on course with deficit reduction plans and consider broader tax changes over time, including a wider value-added tax base, property tax reform and tighter control of welfare spending.

Political instability and market pressure

Pressure on the UK's policy outlook intensifies as speculation over Starmer's future shakes markets and pushes benchmark 10-year borrowing costs to their highest level since 2008. The IMF says further domestic uncertainty could add to an already volatile global backdrop and hold back consumption and investment decisions.

Luc Eyraud, the IMF's mission chief, says investors place a premium on predictable government policy at a time when countries face more frequent shocks, rising public interest costs and weak productivity growth. Finance minister Rachel Reeves says the upgraded forecast supports the government's budget strategy and warns that any move that undermines stability risks leaving families and businesses worse off.

The Fund also sounds a cautious note on Reeves' effort to streamline financial regulation, saying authorities need to ensure that the combined effect of current and proposed measures does not weaken the financial system. In its April forecasts, the IMF cut its projection for British growth in 2026 by 0.5 percentage points, the largest reduction among Group of Seven economies, before announcing a smaller 0.3-percentage-point downgrade on Monday.

Our earlier article on Morningstar DBRS affirming the UK’s AA rating with a stable trend explained that Britain’s credit profile remains supported by a large, diversified economy and strong institutions, even as high public debt, a structural deficit, and energy-driven inflation risks weigh on the outlook. We also noted that the path of fiscal consolidation could be complicated by spillovers from the Middle East conflict and higher energy prices, while the Bank of England’s next steps depend on how persistent the inflation shock becomes. The report highlighted that political uncertainty and execution risks around growth and fiscal repair could affect investor confidence, even as funding flexibility and financial stability remain broadly resilient.

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