UK economy to grow by 1.6 per cent this year, IMF predicts

The improved growth prospects will provide a boost for under-pressure Chancellor Rachel Reeves, who has witnessed a turbulent start to the year for London’s financial markets.

Concerns over potential stagflation – where growth is stagnating but inflation remains high – caused a jump in borrowing costs and a fall in the pound this month.

However, both key metrics have eased back somewhat in recent days, driven by a slowing down of inflation in the UK and US.

Nevertheless, the latest IMF figures showed that the UK economy saw weaker growth last year than the organisation had forecast.

It indicated that UK economy grew by 0.9 per cent last year, down from its previous forecast of 1.1 per cent.

The growth reading was also predicted before the Office for National Statistics revealed on Thursday that UK GDP grew by a weaker-than-expected 0.1 per cent in November.

This came after a 0.1 per cent decline in October and a zero growth over the third quarter of the year.

The IMF said growth will accelerate to 1.6 per cent in 2025 and 1.5 per cent in 2026.

It predicted that the UK will see growth outstrip fellow European economies in Germany, France and Italy over the next two years.

It has forecast that the wider global economy will grow by 3.3 per cent in both 2025 and 2026, with a 0.1 percentage point upgrade for this year.

“Global growth is expected to remain stable, albeit lacklustre,” the report said.

Growth is expected to be above the previous forecast on the back of predicted stronger growth in the US.

The report added: “Inflation is declining, to 4.2 per cent this year and 3.5 per cent next year, in a return to central bank targets that will allow further normalisation of monetary policy.

“This will help draw to a close the global disruptions of recent years, including the pandemic and Russia’s invasion of Ukraine, which precipitated the largest inflation surge in four decades.”

In response, Chancellor Rachel Reeves said: “The UK is forecast to be the fastest growing major European economy over the next two years and the only G7 economy, apart from the US, to have its growth forecast upgraded for this year.

“I will go further and faster in my mission for growth through intelligent investment and relentless reform, and deliver on our promise to improve living standards in every part of the UK through the plan for change.”

Before the figures were made public, the Chancellor insisted she was “here for the long haul”, after days of speculation that her position was in jeopardy.

Speaking to the BBC’s Political Thinking podcast in her first broadcast interview since the market turmoil erupted, she rebuffed critics of her economic decisions and insisted she was “not going to let them get me down”.