UK growth forecast upgraded by IMF but risks remain

The International Monetary Fund (IMF) has upgraded its forecast for the UK's growth this year, but warned the Iran war and "domestic uncertainty" could hit the economy.

In its latest forecast, it said the UK "remained resilient" but added a prolonged conflict in the Middle East risked hitting growth and resulting in "higher energy and food prices".

"Domestic uncertainty could also add to the already volatile global environment, holding back consumption and investment decisions," it added.

The upgrade comes after figures released last week showed the economy grew by 0.6% in the first three months of the year, led by a rebound in areas such as retailing and construction.

The IMF said the UK economy had entered the latest global shock with "more momentum than expected".

It said inflation, which is the rate prices rise at over time, would increase "temporarily" due to higher energy prices.

As the UK imports more energy than it produces domestically, it is more sensitive to rapid rises in global prices.

But the IMF suggested the Bank of England does not need to raise interest rates this year in response.

"Holding rates for the remainder of the year should be sufficient to bring inflation back to target (2%) by end-2027," it said.

The upgraded growth forecast was welcomed by Chancellor Rachel Reeves on Monday.

Reeves said the upgrade in growth was "proof" that the government has the "right economic plan".

"The choices I have made as chancellor mean our economy is in a stronger position as we deal with the costs of the war in Iran," she said.

Following calls for the Prime Minister, Sir Keir Starmer to resign last week, Reeves warned her fellow Labour MPs that "putting our stability at risk when signs of progress are emerging would leave families and businesses worse off".

The government has made growing the economy its main priority in a bid to improve living standards.

When the economy is growing, businesses tend to invest more, more jobs are created and people, on average, tend to feel better off. The opposite can occur if the economy stagnates or shrinks.

The IMF said the government's medium-term plan to reduce borrowing costs "continues to strike a good balance".

It said any household support package for higher energy prices should be targeted and time limited.

The chancellor is expected to outline some cost of living support measures later this week, including a possible cancellation of a planned 5p rise in fuel duty in September.

The IMF warned about "difficult choices" over rising pressures from spending on ageing, defence and the climate transition over the next 20 years.

The "long term scope for further revenue increases is becoming limited unless fundamental tax reforms are envisaged", it said.

The IMF suggested spending restraint, including the triple lock policy on pension and "indexing the state pension to the cost of living".