UK growth forecast upgraded but energy prices and rates to hit in 2027

The IMF has become more optimistic about the UK’s near-term growth, but less optimistic about the following year. It now expects the economy to expand by 1.3% in 2026, compared with 1% in its July forecast. This matters because growth affects jobs, investment, household finances and government revenues.

The improvement reflects greater resilience after the energy price shock linked to the US-Iran war. However, the IMF expects growth to ease to 1.2% in 2027. Higher energy prices can leave households with less money for other purchases. Higher long-term interest rates can also make borrowing more expensive for businesses and families.

The forecast remains uncertain because future world events can change economic conditions. The IMF says the UK is on course to stabilise national debt and have the G7’s lowest annual borrowing in 2031. Chancellor John Healey must use a new OBR forecast when shaping the Budget, due on 28 October.

The IMF expects UK economic growth of 1.3% in 2026 and 1.2% in 2027. These percentages describe how much the economy’s output is expected to increase each year. The figures matter because stronger growth usually supports business investment, job creation and household incomes, while weaker growth can limit those benefits.

The 2026 forecast has been upgraded. In July, the IMF predicted 1% growth, so its new estimate is 0.3 percentage points higher. For 2027, however, the IMF expects only 1.2%. That is below the Office for Budget Responsibility’s March forecast of 1.6% for the following year.

The IMF links the 2027 slowdown to higher energy prices and long-term interest rates. Its forecast also places the UK alongside Germany as the G7’s second-fastest-growing economy after the forecast revisions. Still, forecasts are estimates and can change when wars, prices or financial conditions change.

An economic growth forecast is an informed estimate of how an economy will perform in the future. It usually focuses on whether the economy will expand or shrink and by how much. Governments, businesses and households use forecasts when planning budgets, investment, hiring and spending.

For example, the IMF first expected UK growth of 1% in 2026, then raised that estimate to 1.3%. It also expects growth to slow to 1.2% in 2027 as energy prices and long-term interest rates affect spending and investment. The change shows how forecasts respond to new evidence and changing conditions.

Forecasts can be wrong because they cannot know exactly what will happen next. The article highlights the uncertainty caused by the US-Iran war and says forecasts often turn out to be incorrect because of world events. The OBR is preparing a new forecast, which Chancellor John Healey will use for Budget decisions.

Rising energy prices and interest rates can weaken several parts of the economy at once. Households may spend more on heating and other energy, leaving less for goods and services. Businesses may delay investment because loans cost more. Together, these pressures can slow economic growth.

The article gives a clear example for government finances. Sir Howard Davies said higher global interest rates increase the UK’s debt-interest costs. That means the government may have less money available for public services or new policies. The Resolution Foundation also called for support for people struggling to heat their homes.

The IMF expects UK growth to slow to 1.2% in 2027 because of higher energy prices and long-term rates. Inflation is expected to average 3.3% this year and remain at 2.8% in 2027, above the Bank of England’s 2% target. The Bank has warned inflation could exceed 4% early next year.

Interest rates in one major economy can affect borrowing conditions elsewhere. Sir Howard Davies said the US is adding to its debt pile, putting pressure on interest rates around the world. Because the UK relies on financial markets to borrow money, higher global rates can increase the cost of servicing UK government debt.

The article also connects conflict with energy prices. The US-Iran war caused an energy price shock, although economies proved more resilient than expected. If energy becomes more expensive, inflation can rise. The Bank of England has predicted UK inflation could exceed 4% at the beginning of next year, making higher interest rates more likely.

These effects can reinforce each other. Higher global rates raise UK borrowing costs, while energy prices squeeze households and businesses. The IMF therefore expects UK growth to slow to 1.2% in 2027. It calls the conflict’s economic fallout highly uncertain, so the outlook could change.

The IMF is an international organisation that publishes economic forecasts for countries and groups such as the G7. Its UK forecast says growth will reach 1.3% in 2026 before slowing to 1.2% in 2027. Governments and markets watch its judgments, although the IMF stresses that forecasts are only estimates.

The Office for Budget Responsibility is the UK’s official forecaster for public finances and the economy. It predicted 1.6% growth for the following year in March and is now preparing a new forecast. Chancellor John Healey will use that forecast when making Budget decisions on tax and spending.

The Bank of England focuses on inflation and interest rates. Its target is 2%, but the article says inflation is expected to remain above that in 2027. The Bank has also warned inflation could rise above 4% early next year. These assessments influence borrowing costs, spending and investment across the economy.

Inflation means prices are rising, so households may need to spend more to buy the same things. This can reduce spending elsewhere, especially when energy costs rise. Interest rates affect the cost of borrowing. Higher rates can make households more cautious and businesses less willing to invest.

The article expects UK inflation to average 3.3% this year and remain above the Bank of England’s 2% target at 2.8% in 2027. The Bank has also predicted inflation could rise above 4% early next year. This could make higher interest rates more likely, increasing pressure on household budgets and business plans.

When conditions are favourable, growing businesses tend to invest more and create more jobs. People may then feel better off on average. The opposite can happen when an economy stagnates or shrinks. The IMF expects higher energy prices and long-term interest rates to slow UK growth to 1.2% in 2027.