(Bloomberg) — The International Monetary Fund has offered only luke-warm support for Rachel Reeves’ big-spending budget, upgrading its growth forecast for this year by just 0.1 percentage points and leaving it as the third fastest growing Group of Seven economy behind the US and Canada.
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The global financial and economic watchdog raised its UK growth forecast for 2025 to 1.6% from 1.5% and left its 2026 outlook unchanged at 1.5%.
However, a downgrade to last year’s growth estimate to 0.9% from 1.1% means the IMF now believes that the UK will expand more slowly across both 2024 and 2025 than it was forecasting last October, just days before the budget.
Furthermore, the marginally improved outlook for 2025 pales against the extra 0.5 percentage point boost to growth that the UK’s Office for Budget Responsibility said Reeves’ October budget would deliver this year. Reeves will borrow an extra £29 billion in 2025-26, equivalent to 1% of GDP, according to the OBR.
Speaking to the press, IMF Economic Counsellor Pierre-Olivier Gourinchas said the budget increases in public investment will “lead to higher economic activity, we see some positives from increased public spending.” He expects the Bank of England to cut interest rates four times this year, helping to support economic activity. There will also be “a continued pick-up in real incomes and consumption.”
Labour’s first six months in office have been marked by stagnant growth and sticky inflation, which last week contributed to a surge in borrowing costs that threatened to blow a hole in Reeves’ fiscal plans. The latest economic data shows the economy was smaller in November than in June last year, just before Labour took power.
Responding to the IMF’s update World Economic Outlook, Reeves said: “The UK is forecast to be the fastest growing major European economy over the next two years and the only G7 economy, apart from the US, to have its growth forecast upgraded for this year. I will go further and faster in my mission for growth through intelligent investment and relentless reform.”
Debt Worries
Britain has been rocked this year by global bond market turbulence that raised questions about the sustainability of UK debt as higher borrowing costs threaten to drive up the deficit. Reeves has said her rules are “non-negotiable” and apply “at all times.”
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In a blog accompanying the IMF release, Gourinchas wrote: “For several countries, fiscal policy efforts have been delayed or insufficient to stabilize debt dynamics. It is now urgent to restore fiscal sustainability before it is too late and to build sufficient buffers to address future shocks that could be sizable and recurrent. Additional delays could trigger a worrying spiral where borrowing costs keep rising as markets lose confidence, further increasing adjustment needs.”
Before the October budget, the IMF warned that debt risks in the UK “were elevated” and the “lack of credible plans for dealing with it can trigger adverse market reactions.”
(Updates with quotation from press conference in fifth paragraph.)
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