The International Monetary Fund upgrades UK’s economic forecast for 2026 but warns governments against unfunded measures to soften the impact of higher living costs
Chancellor John Healey will use the Budget to provide “breathing space” for the hardest hit households while seeking to reassure bond markets (Image: Ian Vogler / Daily Mirror)
The International Monetary Fund says the UK economy has done better-than-expected this year but warned the Middle East war means higher energy and food bills to come for millions of households.
In its latest report, released alongside annual meetings in Bangkok, the IMF forecast the UK’s gross domestic product – the value of everything the country churns out – will grow by 1.3% this year, having previously predicted a 1% rise. However, growth for next year is set to slow to 1.2%, down from a previous forecast of 1.3%.
It also indicated a shock to the labour market has been shallower than expected, with UK unemployment set to strike 5.3% this year, down from a prediction of 5.6%.
The IMF now thinks UK inflation will average 3.3% this year, up from its previous forecast of 3.2%, and the joint second-highest rate among the G7 group of countries. It then predicts it will slow to 2.8% next year, but this is significantly higher than the 2.4% rate previously forecast.
It came as the IMF warned governments against dishing out unfunded giveaways ahead of this month’s Budget when Chancellor John Healey is expected to announce targeted help for cash strapped households.
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With a fortnight to go before Mr Healey delivers his first Budget, the IMF said it was urgent that governments around the world reduce their borrowing. It also stressed that help for households with cost of living pressures should be used “sparingly”.
PM Andy Burnham has already temporarily knocked the 5% VAT off domestic electricity bills, but the £45 average annual saving is small compared with a threatened 16% spike in prices in January’, caused by the ongoing US-Iran war.
One option for the Chancellor is to extend the VAT cut beyond next April, although campaigners say there should be a more targeted approach. That could come in the form of widening the criteria for the Warm Home Discount, a government-backed scheme that offers a reduction of £150 off electricity bills for the winter period between October and March.
It’s available to those who get Pension Credit or Universal Credit but could be extended to all those on means-tested benefits. Think tank the Resolution Foundation says na new temporary scheme targeted at those with an income of below £24,000 would extend beyond benefit recipients, and save eligible households £175 on average.
Most recent figures from the Office for National Statistics (ONS) showed that inflation increased to 3.1% in August and is expected to jump to 3.3% when figures for September are released.
It came as new figures from number crunchers Worldpanel revealed that grocery price inflation rose to 2.5% over the four weeks to October 4, up from 2.3% last month. A survey alongside it found that more than half of shoppers say they are very or extremely concerned about rising fuel prices as the cost of living remains front of mind ahead of the Budget
Mr Healey said: “Conflict in the Middle East and Europe is hitting people in the UK and around the world. “But Britain’s economy is showing strong international resilience in the face of these challenges: we’re forecast to be the joint second fastest-growing G7 nation in 2026 and have the lowest deficit in the G7 by 2031.
“This week I will meet international finance ministers in Bangkok to discuss how we limit the impact of the conflicts on people and businesses, while maintaining strong fiscal discipline. We are determined to drive good growth in every postcode, provide some breathing space for today, and fresh hope for the future.”
Asked what advice the IMF had for the UK, economic counsellor Silvana Tenreyro said: “The message for the UK is just simply stay the course and continue on that trajectory.”
Shadow chancellor Andrew Griffith said: “John Healey must tackle both problems in the Budget by getting Britain drilling and dealing with out of control welfare spending. If the Chancellor reaches for more tax rises instead, he is choosing slower growth and working people will pay for it.”
