The IMF expects the UK economy to grow by 1.6% this year, the fastest rate among the major European nations in 2025 and in years to come.
This promising outlook provides a boost for the UK’s Labour government under Sir Keir Starmer. He and his Chancellor of the Exchequer (Chancellor) Rachel Reeves have faced criticism over their economic policies amidst a period of slow growth and relatively high inflation.
The IMF predicts that the UK’s economic growth this year will be greater than that of Germany, France, and Italy, Europe’s other major economies.
This upward revision from previous estimates is due to several factors, including greater government investment, rising household incomes, and the Bank of England’s policy of cutting interest rates to stimulate growth.
Reasons for Optimism
Pierre-Olivier Gourinchas, the IMF’s chief economist, explained that the optimistic forecast is partly due to the impact of recent government expenditure plans, which aim to boost spending on infrastructure and other key areas.
There will be some drag from Labour’s increases in UK taxes, Gourinchas acknowledged, however, he believes the overall effect on growth will be positive.
At an IMF press conference, Gourinchas said:
“We are projecting 1.6 percent growth for 2025. That’s a slight upward revision by 0.1 percentage point compared to October. And that’s a pickup in growth from 2024.”
“Now, some of that revision is reflecting the fact that we have some continued pickup in real incomes and in consumption in the UK, but it also reflects some of the effect of the fiscal measures that have been announced by the authorities in their October budget that are expected to lead to higher public investment, in particular, that will support economic activity. ”
Other international organizations have reported optimistic forecasts for the UK’s economy. The Organization for Economic Co-operation and Development (OECD) has revised its growth projections upwards.
However, the figures of the IMF and OECD are still below the UK government’s own estimates, which predict even stronger growth in the coming years.
Challenges on the Horizon
Despite the encouraging outlook, challenges remain. The UK economy stagnated during the latter months of 2024, and inflation continues to be a concern, despite a recent decline.
The recent increase in borrowing costs (interest rates) puts added pressure on the government to maintain fiscal discipline.
Furthermore, the global economic landscape presents its own set of risks. According to the IMF, China’s economic growth will most likely continue being relatively weak. There is a good chance that US interest rates will rise this year under the New Trump administration.
During his presidential campaign, Donald Trump said he would impose additional tariffs on imports from China, Mexico, Canada, and Europe. If he makes good on that pledge, Britain’s exports to the US could suffer.
Political Debate Heats Up
The IMF’s forecast of the UK economy has strengthened the government’s position in the current economic debate. Chancellor Reeves welcomes the prediction, arguing that her government’s economic strategy is working.
She has pledged to continue pursuing policies aimed at boosting growth and improving living standards.
The Independent newspaper quotes Chancellor Reeves as saying:
“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.”
Opposition parties, however, argue that the recent tax increases and spending plans will undermine economic growth and place unnecessary pressure on consumers and businesses. They believe that the recent interest rate rises are a sign that the government’s fiscal policies are unsustainable.
Looking Ahead
While the IMF’s forecast provides a welcome respite for the government and optimism for businesses and consumers, there are some major challenges ahead.
The government will need to carefully navigate these challenges to ensure that the UK economy continues on a path of sustainable growth.