UK economy to grow by 1.6% this year after weaker-than-expected 2024 – IMF

UK economic growth is set to accelerate this year after it missed forecasts in 2024, the International Monetary Fund has said.

The global economic body slightly upgraded its growth projection for the UK in a fresh update of its influential World Economic Outlook report.

The IMF said UK gross domestic product (GDP) is on track to grow by 1.6% in 2025, edging up from the 1.5% it predicted in October last year.

The IMF’s chief economist, Pierre-Olivier Gourinchas, said some of the revision reflects “continued pick-up in real incomes and consumption”, and the fact that the Bank of England has started, and is expected to continue, cutting interest rates.

But he said it also reflects policy measures in the autumn Budget which are expected to boost public investment in the UK.

“We see some positives coming from increased public spending,” Mr Gourinchas said.

“Of course, some of the Budget is financed by increased taxes – national insurance contributions have been increased – that could weigh down, but the net effect in our assessment is still positive for growth for the UK economy in 2025.”

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 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% last year, down from its previous forecast of 1.1%.

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% in November.

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

The IMF said growth will accelerate to 1.6% in 2025 and 1.5% 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% 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.

But Mr Gourinchas added that, for the US, “many of the uncertainties originate with potential policy shifts under the new administration” led by President-elect Donald Trump.

For example, higher tariffs or curbs on migration could weigh on output in the country and also add to inflationary pressures.

Mr Gourinchas said: “Any combination of these policies is likely to add to price pressures in the US – higher inflation would prevent the Federal Reserve from cutting interest rates as they initially planned.

“These policies will also likely strengthen the dollar and tighten financial conditions elsewhere.”

“Uncertainty about whether there might be a new wave of trade tensions” prompted the IMF to revise downwards its growth rate for global trade over the next two years, he added.

The report added: “Inflation is declining, to 4.2% this year and 3.5% 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.”