The International Monetary Fund (IMF) has upgraded its growth forecast for the United Kingdom this year, while warning that the ongoing Iran conflict and rising domestic uncertainty could still weigh heavily on the economy.
The IMF revised the UK’s projected growth rate for 2026 to 1 per cent, up from an earlier estimate of 0.8 per cent. The adjustment comes just weeks after the Fund cautioned that the UK was likely to be among the advanced economies most exposed to the economic fallout from the Iran war.
In its latest assessment, the IMF said the UK economy had so far remained resilient, but warned that a prolonged Middle East conflict could trigger higher energy and food prices, with wider consequences for economic growth.
“Domestic uncertainty could also add to the already volatile global environment, holding back consumption and investment decisions,” the IMF noted.
The revised outlook follows fresh data showing the UK economy expanded by 0.6 per cent in the first quarter of the year, driven largely by stronger performances in sectors such as retail and construction.
According to the IMF, the British economy entered the latest global crisis with “more momentum than expected”.
The Fund also projected that inflation would rise temporarily due to increasing energy costs. As a net energy importer, the UK remains particularly vulnerable to sharp increases in global fuel prices.
Despite inflation concerns, the IMF indicated that the Bank of England may not need to raise interest rates further this year. Interest rates currently stand 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 IMF said.
While the report did not directly address the political turmoil that recently affected the Labour government following poor election results, it warned that political instability at home could further weaken economic confidence alongside external pressures from the Iran conflict.
UK Chancellor Rachel Reeves welcomed the upgraded forecast, describing it as evidence that the government’s economic policies are working.
“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 after growing pressure within the Labour Party following calls for Prime Minister Sir Keir Starmer to resign after last week’s election setbacks.
Reeves had earlier urged Labour MPs not to undermine economic stability at a time when signs of recovery were beginning to emerge.
The IMF also backed the UK government’s commitment to controlling borrowing and reducing the budget deficit, saying fiscal discipline would help maintain market confidence and financial credibility.
Luc Eyraud, the IMF’s mission chief to the UK, said investors increasingly favour governments that maintain clear and predictable economic policies.
“Today’s policymaking is constrained by a more volatile external environment with more frequent and overlapping shocks,” he said, adding that rising public debt and weak productivity growth continue to pose long-term challenges.
The IMF further warned that the UK government could face difficult fiscal decisions in the years ahead due to increasing pressures from healthcare, pensions, defence spending 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 become necessary, including possible reforms to the state pension “triple lock” system.
At the same time, the IMF said any government support package aimed at easing higher energy costs should be temporary and targeted at the most vulnerable households.
The UK government is expected to announce additional cost-of-living support measures later this week, including a 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 organisation acknowledged that global economic projections remain highly uncertain and can quickly change due to geopolitical developments and other unforeseen events.