The UK economy is expected to grow faster than previously forecast in 2026, despite the economic fallout from the war involving the United States, Israel and Iran. However, the International Monetary Fund (IMF) has warned that higher energy prices, persistent inflation and elevated interest rates could weigh on growth next year.
In its latest global economic outlook, the IMF raised its UK growth forecast for 2026 to 1.3%, up from the 1% projected in July. The assessment also highlighted the UK’s relative position on government borrowing and the risks facing households and businesses.
Here are three key takeaways from the report.
1. The UK Economy Is Proving More Resilient Than Expected
The conflict involving Iran has disrupted energy production and transportation across the Middle East, pushing oil prices higher and increasing inflationary pressures. Central banks, including the Bank of England, may respond with further interest rate increases if price pressures persist.
Despite these challenges, the IMF believes the global economy is performing better than anticipated, supported in part by increased investment in artificial intelligence.
The UK has benefited from this more resilient outlook, with the IMF upgrading its growth projection for 2026. Economic expansion can support business investment, hiring and consumer spending, although the improved forecast does not mean the country is insulated from further energy price shocks.
2. The UK Is Making Progress on Government Borrowing
The IMF’s projections suggest that the UK is comparatively well positioned among major economies when it comes to reducing government borrowing. By 2031, the country is expected to have the lowest annual borrowing among the G7 group, which includes Canada, France, Germany, Italy, Japan and the United States.
Former Bank of England deputy governor Sir Howard Davies attributed the UK’s relative position largely to a government with a parliamentary majority and a stated commitment to addressing its finances. Meeting that objective could require higher taxes, reductions in public services or a combination of both.
Davies contrasted this with the challenges facing countries such as the United States, France and Germany, where he said political conditions have made deficit reduction more difficult.
The IMF also expects the UK to record the G7’s second-fastest economic growth in 2026, alongside Germany. However, Davies cautioned that this relative performance should not obscure the UK’s modest underlying growth rate.
3. Inflation and Interest Rates Could Put More Pressure on Households
Although the IMF improved its forecast for 2026, it slightly lowered its growth outlook for 2027. It expects higher energy costs and elevated interest rates to increasingly affect household spending and business investment.
The fund forecasts that UK inflation will average 3.3% in 2026 before easing to 2.8% in 2027. Its previous estimate for next year’s inflation rate was 2.4%, meaning the outlook has deteriorated.
Tim Armitage, an investment strategist at Quilter Cheviot, said rising inflationary pressure could force the Bank of England to consider further interest rate increases. He noted that at least one rate rise was anticipated in 2026, with additional increases expected in 2027.
Higher borrowing costs could make mortgages and other loans more expensive while encouraging businesses to delay investment. Consumers may also find that persistent price increases continue to squeeze household budgets.
Overall, the IMF’s assessment presents a mixed picture: the UK is showing greater resilience than previously expected and appears comparatively well positioned on government borrowing, but the outlook remains vulnerable to energy market disruption, inflation and tighter monetary policy.
