The International Monetary Fund (IMF) has upgraded its growth forecast for the United Kingdom this year, but warned that the ongoing Iran conflict and rising domestic uncertainty could still weigh heavily on the economy.
The IMF revised its UK growth projection for 2026 upward to 1 per cent from the earlier estimate of 0.8 per cent. The adjustment comes after the Fund recently warned that the UK could be among the advanced economies most affected by the economic consequences of the Iran war.
In its latest outlook, the IMF said the UK economy had remained resilient despite mounting global pressures. However, it cautioned that a prolonged conflict in the Middle East could slow growth and trigger higher energy and food prices.
“Domestic uncertainty could also add to the already volatile global environment, holding back consumption and investment decisions,” the IMF said.
The improved forecast follows new data released last week showing the UK economy grew by 0.6 per cent during the first quarter of the year, supported by stronger activity in sectors such as retail and construction.
According to the IMF, the UK entered the latest global crisis with “more momentum than expected”.
The Fund also projected that inflation would rise temporarily due to higher global energy prices. Because the UK imports more energy than it produces domestically, it remains particularly vulnerable to sudden increases in international fuel costs.
Despite the inflation concerns, the IMF suggested the Bank of England may not need to raise interest rates further this year. The benchmark interest rate currently stands at 3.75 per cent.
“Holding rates for the remainder of the year should be sufficient to bring inflation back to target (2%) by end-2027,” the Fund stated.
Although the IMF did not directly comment on the recent political tensions surrounding the Labour government following disappointing election results, it warned that political uncertainty at home could weaken economic confidence alongside the impact of the Iran conflict.
UK Chancellor Rachel Reeves welcomed the revised forecast, describing it as evidence that the government’s economic strategy is beginning to deliver results.
“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.
Her comments come amid growing political pressure on Prime Minister Sir Keir Starmer after calls for his resignation following last week’s electoral setbacks.
Reeves had earlier urged Labour MPs to avoid actions that could undermine economic stability at a time when signs of recovery were beginning to emerge.
The IMF also backed the UK government’s commitment to reducing borrowing and controlling the budget deficit, saying fiscal discipline would help maintain market confidence and economic credibility.
Luc Eyraud, the IMF’s mission chief to the UK, said investors continue to place high value on stable and predictable government policies.
“Today’s policymaking is constrained by a more volatile external environment with more frequent and overlapping shocks,” he said, citing rising public debt levels and weak productivity growth as additional long-term concerns.
The IMF further warned that the UK government could face difficult fiscal decisions over the coming years due to increasing spending pressures linked to ageing populations, defence needs and climate transition policies.
It noted that there may be limited room for future tax increases unless broader tax reforms are introduced.
The Fund also suggested that long-term spending restraint measures may eventually be required, including possible reforms to the state pension “triple lock” system.
At the same time, the IMF recommended that any government support aimed at cushioning households from higher energy prices should be targeted and temporary.
The UK government is expected to announce additional cost-of-living support measures later this week, including the possible cancellation of a planned 5p increase in fuel duty scheduled for September.
Although IMF forecasts are closely monitored by governments and investors worldwide, the Fund acknowledged that economic projections remain uncertain and can change rapidly due to geopolitical developments and other unexpected global events.