The IMF has slightly upgraded its UK economic growth forecast for 2025 to 1.3%, making the UK the second fastest-growing G7 economy after the US, but has downgraded its 2026 outlook due to labor market concerns.

Despite positive growth prospects, UK inflation is expected to be the highest in the G7, averaging 3.4% in 2025 and declining to 2.5% in 2026, driven by rising energy and utility bills.

Recent data shows UK CPI inflation reached 3.8% in July and August, the highest since early 2024, mainly due to increased labor and tax costs affecting food and hospitality prices.

Slower growth in the UK could reduce household wealth and limit government borrowing capacity, with the IMF noting that faster AI adoption could boost productivity if managed properly.

The IMF warns that persistent inflation and sluggish productivity have increased government borrowing costs and market volatility, with rising yields on UK bonds reflecting investor concerns.

While the UK is showing signs of economic resilience, the IMF emphasizes that many inflation drivers are temporary, though risks like higher wage growth and reduced inflation expectations remain.

UK's economic outlook faces challenges from rising unemployment at 4.8%, weak productivity growth, and the Bank of England considering higher interest rates to curb inflation.

UK public finances are strained, with deficits estimated between £30bn and £40bn, as rising inflation and pay demands threaten to worsen the financial gap.

Political reactions include opposition calls for the government to avoid further tax hikes and focus on public spending reforms to stimulate growth, amidst criticism from figures like Sir Mel Stride blaming Labour policies for inflation.

UK Chancellor Rachel Reeves welcomed the IMF's positive outlook but stressed the need to address economic stagnation felt by many citizens, signaling government efforts to improve living standards.

Despite the optimistic forecasts, some officials warn of a potential downturn or recession, with the Bank of England highlighting sluggish growth and the IMF advising caution in monetary policy easing.

The IMF notes Spain as the fastest-growing large Western economy, while Russia's post-war economic growth has slowed, and there are concerns over declining aid budgets for poorer nations amid increased defense spending.

Globally, the IMF upgraded its 2025 world GDP growth forecast to 3.2%, citing resilience despite US tariffs, but warned of risks including US immigration policies, stock market valuations, and potential AI market corrections.

The IMF also highlighted signs of weakening economic resilience, citing Brexit and global trade tensions, which have affected investment and stability.

UK public finances are under pressure, with deficits between £30bn and £40bn, as rising inflation and pay demands threaten to worsen the financial situation.

The IMF points out that ongoing inflation is partly driven by regulated prices and increased employer contributions, further straining households and businesses.

Long-term growth prospects in the UK are downgraded, with higher tariffs and population growth outpacing economic expansion, leading to a decline in GDP per capita.

IMF Chief Economist Pierre-Olivier Gourinchas advised the Bank of England to be cautious with interest rate cuts, emphasizing the importance of stabilizing inflation around 2%.

UK's strong economic activity in the first half of 2025 and an improved trade outlook, partly due to a US-UK trade deal, contributed to the IMF's upgraded forecast.

UK officials, including Chancellor Rachel Reeves, acknowledge economic growth but emphasize the need to tackle stagnation and improve living standards, amid warnings of a possible downturn.