IMF raises UK growth forecast to 1.3%

The International Monetary Fund has raised its forecast for UK economic growth in 2026 to 1.3%, reflecting stronger activity during the first half of the year while warning that higher energy prices and borrowing costs could constrain the recovery in 2027.

The projection, published in the IMF’s October World Economic Outlook, represents a 0.3 percentage-point increase from its July estimate of 1.0% and a 0.5-point improvement against April’s forecast. Growth is expected to moderate to 1.2% next year, with inflation and financing conditions continuing to affect consumption and investment.

Britain’s performance during the first half of 2026 was stronger than the fund had previously anticipated, with economic activity benefiting from investment and demand associated with artificial intelligence. Software, consultancy services and other technology-related businesses have contributed to that activity, although the IMF has also identified risks surrounding the sustainability of the global AI investment cycle.

The upward revision comes despite continued disruption in international energy markets linked to conflict in the Middle East. Higher energy costs have affected businesses that depend heavily on electricity, fuel and imported materials, while elevated interest rates have increased the cost of financing capital investment.

The IMF expects UK inflation to average 3.3% during 2026 and 2.8% in 2027, remaining above the Bank of England’s 2% target in both years. Although inflation is forecast to ease, businesses may continue to face pressure from wages, energy bills and the cost of borrowing.

Higher economic growth does not necessarily translate into equivalent improvements across every industry. Technology investment can contribute substantially to output while consumer-facing businesses remain exposed to weaker household spending and companies contemplating major physical investments face comparatively expensive financing.

The wider international outlook presents a similarly uneven picture. The IMF has raised its forecast for global growth in 2026 to 3.1%, with expansion expected to reach 3.4% next year. Technology investment has contributed to the improvement, but the benefits are concentrated in particular economies and sectors.

Countries with substantial involvement in advanced computing and associated supply chains have benefited from capital expenditure, while economies more exposed to imported energy costs have faced greater pressure. The fund has warned that a prolonged Middle East conflict, further disruption to shipping and renewed volatility in financial markets could undermine its central forecasts.

For Britain, the revised projections arrive ahead of the Chancellor’s Budget on 28 October. John Healey faces competing demands for public expenditure while seeking to maintain the government’s plans for reducing borrowing over the medium term.

The IMF has urged the UK to maintain its fiscal consolidation programme, arguing that higher borrowing costs make discipline over public finances increasingly important. Britain has established a medium-term path for reducing its deficit, although meeting that commitment will depend on economic performance and the government’s revenue and spending decisions.

The link between public finances and the wider business environment is particularly relevant while government bond yields remain elevated. Higher sovereign borrowing costs can influence financing conditions elsewhere in the economy, including the cost of capital available to businesses seeking loans or issuing debt.

Companies considering substantial projects must assess the expected demand for their products and services against borrowing costs, construction expenditure and the time required to generate returns. Where financing remains expensive, otherwise attractive investments may be delayed or undertaken on a smaller scale.

Monetary policy presents a related constraint. Persistent inflation can limit the Bank of England’s scope to reduce interest rates, even if employment or consumer demand weakens. Future decisions will depend on incoming economic evidence rather than the IMF’s forecasts alone.

There is also uncertainty surrounding the contribution that artificial intelligence will make to productivity over the longer term. Expenditure on technology infrastructure can lift investment during construction and deployment, but sustained improvements in economic output will depend on how effectively the technology is used throughout the economy.

The IMF’s revised forecast therefore describes stronger UK growth in the current year alongside a more difficult outlook for 2027. Whether the improvement persists will depend on energy prices, financing conditions, business investment and the ability of productivity gains to spread beyond the sectors currently receiving the greatest investment.