IMF downgrades UK growth and warns inflation will be highest in G7
Inflation in the UK is set to surge above all G7 countries in the next two years while growth per capita will lag behind the average across advanced economies, the International Monetary Fund (IMF) has predicted.
In its World Economic Outlook report, the IMF has said that inflation in the UK will remain higher than the likes of Italy and the United States, where tariffs are raising prices for American consumers.
The IMF singled out the UK for its higher price growth as it predicted inflation to be 3.4 per cent over 2025 before dropping to 2.5 per cent next year, with “regulated prices” through higher energy and water bills keeping price growth high.
Forecasters claimed a “loosening labour market and moderating wage growth” would allow inflation to fall back to two per cent by the end of next year.
By comparison, the US is set to see inflation in consumer prices hit 2.7 per cent this year and 2.5 per cent next year.
The IMF is now the second major forecaster to highlight the UK’s outstanding inflation problems after the OECD forecast the UK to suffer from higher price growth than the G20 average.
Earlier in the day, Rachel Reeves told her colleagues in the Cabinet that the government had to focus on curbing inflation levels and reducing the public debt.
Growth forecasts revised
The UN body also edged up its 2025 growth forecast to 1.3 per cent but it also downgraded its 2026 projection from 1.4 per cent to 1.3 per cent.
Economists at the IMF said a boost in activity over the first half of 2025 and the UK-US trade deal announced in May had improved the outlook for the UK, growth was still set to be 0.4 percentage points lower than forecast at the same time last year.
The US is set to enjoy growth of two per cent this year and 2.1 per cent next year while Germany, France and Japan are set to lag behind the UK.
On a per capita basis, UK growth would lag far behind those seen across advanced economies at 0.4 per cent growth this year and 0.5 per cent growth next year.
The average for advanced economies is set to be 1.2 per cent this year and 1.4 per cent next year, weighed up by high levels across Japan and the US.
Reeves celebrated the IMF’s “second consecutive upgrade to this year’s growth forecast” in a statement.
“It’s no surprise, Britain led the G7 in growth in the first half of this year, and average disposable income is up £800 since the election,” the Chancellor said.
“But know this is just the start. For too many people, our economy feels stuck. Working people feel it every day, experts talk about it, and I am going to deal with it.
“Working together, we can deliver a Britain built for all.”
Shadow Chancellor Mel Stride said: “The IMF assessment makes for grim reading. Inflation in the UK is now set to be the highest in the G7 this year and next – rising faster than expected because of the choices Rachel Reeves has made.
“Since taking office, Labour have allowed the cost of living to rise, debt to balloon, and business confidence to collapse to record lows. Taxes are rising to record highs and families are being squeezed from all sides.
“Labour should be getting spending under control to bring down borrowing and avoid damaging tax rises, but Starmer and Reeves are simply too weak to do it.”
IMF raises alarm on rising debt
The IMF’s latest report also pointed to the risk of the rising cost of borrowing given high interest rate levels and deepening fiscal deficit among many of the most advanced economies.
It warned that fiscal policy was “too loose” as IMF economists urged governments across France and the US to stabilise debt ratios to GDP, with further costs set to weigh on public finances in the coming years.
“Spending pressures from aging populations, defense, and energy security add to the risks, especially in Europe.”
“The calculus of post-pandemic debt sustainability is complicated by elevated debt ratios, worsening primary balances, higher interest rates, and a weakening growth outlook.
“As policy rates were hiked in light of the inflation surge in 2021–22, interest rates at the short end of the yield curve were suddenly much higher and contributed significantly to the rising cost of debt servicing.”
In a meeting with Cabinet colleagues on Tuesday morning, Reeves warned that getting the public debt down was crucial given the cost of interest payments to lenders.
She also said the government would look to curb inflation in upcoming policy proposals, with the looming Budget expected to lead to higher taxes and cost households more.
The IMF’s report was less gloomy about the threats President Trump’s tariffs posed for global economies as it said countries had “shown resilience” given shocks “materialised on a smaller scale than expected”.
It pointed out that the UK had suffered more than other countries from a fall in exports to the US, with uncertainty around global trade policy to “remain elevated”.
It said the relationship between the US and China would remain in the balance throughout the course of the next two months while ongoing legal proceedings in the US on the use of tariffs could also change the future of international trade.