IMF Upgrades UK Growth Forecast but Warns on US Tariffs and Productivity

Britain’s economy set to grow faster in 2025, but trade tensions and sluggish productivity cloud long-term outlook

UK Growth Outlook Upgraded by IMF

The International Monetary Fund (IMF) has revised its UK growth forecast slightly upwards, predicting the economy will grow by 1.2% in 2025, up from its April estimate of 1.1%. The upgrade comes despite lingering global trade tensions and concerns over productivity.

The IMF noted that the UK is beginning to recover from a slowdown in late 2024 and highlighted positive momentum heading into 2026.

Trade Tensions Threaten Future Gains

Despite the modest upgrade, the IMF warned that US trade tariffs remain a key threat to UK economic stability. While the UK and the US have reached a temporary agreement to avoid certain tariffs—such as the 25% duty on cars and metals—uncertainty remains high.

If unresolved, the ongoing trade tensions are expected to reduce UK GDP by 0.3% by 2026, due to:

• Persistent uncertainty in global trade policy
• Slower demand from key UK trading partners
• Direct impacts from remaining US tariffs

Long-Term Productivity Weakness Persists

The IMF also issued a stark warning on the UK’s productivity, stating it continues to drag down medium-term growth prospects. The report identified several contributing factors:

• Chronic under-investment in both public and private sectors
• Low research and development (R&D) spending
• Limited access to business finance
• Skills shortages and a decline in public health outcomes

These long-standing issues have constrained the UK economy since the 2008 financial crisis and remain a structural weakness.

Interest Rate Cuts Expected

The IMF expects the Bank of England to continue reducing interest rates gradually, suggesting a cut of 0.25 percentage points every quarter, until rates reach around 3%, down from the current 4.25%.

However, recent inflationary pressures and fragile growth have complicated monetary policy decisions. The IMF acknowledged the more challenging environment facing UK policymakers.

UK Government Praised for Fiscal Balance

Despite the economic headwinds, the IMF praised the government’s fiscal strategy, stating it "strikes a good balance between supporting growth and safeguarding fiscal sustainability." This includes recent initiatives such as:

• The national living wage increase benefiting three million workers
• Wages rising faster than inflation by an average of £1,000 over the past year
• Three new trade deals aimed at protecting jobs and lowering prices

Chancellor Welcomes Forecast Upgrade

Chancellor Rachel Reeves welcomed the IMF’s revised forecast, highlighting the UK’s strong Q1 growth performance and the impact of government reforms.

“The UK was the fastest growing economy in the G7 for the first three months of this year, and today the IMF has upgraded our growth forecast,” she said.

Reeves credited the improvements to the government's “plan for change”, aimed at making the economy work better for working people.

Steady Recovery with Structural Risks

• UK GDP forecast raised to 1.2% for 2025
• US tariffs and global trade tensions could dent long-term growth
• Weak productivity continues to limit economic potential
• Interest rates expected to fall gradually to 3%
• Fiscal strategy praised, with growth-supportive policies in place

While the UK economy is showing early signs of recovery, unresolved trade issues and persistent productivity challenges pose risks to sustained growth.

Sources: (SKY.com)