IMF nudges up UK's 2025 growth forecast, sees 'significant risks' to deficit goals

The IMF has slightly increased its 2025 UK growth forecast to 1.2%, up from 1.1% in April, citing strong Q1 GDP performance and resilience, while projecting 1.4% growth for 2026 due to anticipated BoE rate cuts and increased spending. Despite the improved outlook, the IMF cautions that significant risks remain to the UK's fiscal deficit reduction goals, particularly due to global uncertainty and volatile financial markets, and urges adherence to existing fiscal plans amid rising borrowing costs and pressures to increase spending.

Analysis

The International Monetary Fund has marginally upgraded its 2025 UK growth forecast to 1.2%, a slight increase from the 1.1% projected in April, citing the strong GDP performance in the first quarter which demonstrated the UK economy's resilience. The forecast for 2026 remains at 1.4%, predicated on anticipated Bank of England interest rate cuts, higher asset and property prices, stronger consumption, and increased public spending. Despite these positive revisions, which finance minister Rachel Reeves welcomed, the IMF underscored "significant risks" to the UK's fiscal deficit reduction goals. These risks stem from global uncertainty, volatile financial markets, and the challenge of containing day-to-day spending, especially as the cost of new 30-year government borrowing recently hit its highest level since 1998. The IMF urged adherence to existing plans to balance spending with tax revenue by 2029/30, noting that headwinds such as U.S. tariffs (expected to reduce annual output by 0.3%) and domestic tax increases further complicate the fiscal landscape. The Fund anticipates the BoE will cut rates more aggressively than markets currently price, reaching around 3%. Additionally, the IMF proposed that the Office for Budget Responsibility de-emphasise its biannual fiscal headroom figure to reduce policy volatility.

Key Decisions for Investors

• Investors should acknowledge the modest improvement in the UK's near-term growth outlook but remain vigilant regarding the substantial fiscal risks and pressures on public borrowing highlighted by the IMF.
• Monitor upcoming UK fiscal announcements, including the June 11 spending review and the autumn budget, for adherence to deficit reduction targets and potential impacts from increased spending commitments or tax changes.
• Consider the IMF's projection for more significant Bank of England rate cuts than currently priced by markets, which could influence fixed income strategies and the valuation of sterling-denominated assets, while also factoring in the negative impact of U.S. tariffs on UK output.