IMF upgrades UK growth forecast and takes swipe at Trump plans

The International Monetary Fund has upgraded its forecast for UK growth this year in its biannual assessment of the global economy, while taking a swipe at plans by Donald Trump’s incoming US administration for the potentially destabilising effect of large-scale tax cuts, import tariffs and weaker regulations.

In a fillip to the Labour government, the Washington-based organisation said it expected the UK economy to grow by 1.6% in 2025, up from an earlier forecast of 1.5%.

The IMF judged that Labour’s increase in investment spending, improved household finances and a series of interest rate cuts by the Bank of England would give the UK economy a lift, after growing by 0.9% in 2024 according to the fund’s expectations.

The UK upgrade was in contrast to the eurozone, where the IMF revised down its forecasts for growth in 2025 in Germany, France and Italy.

Analysts at the IMF said they believed the Bank of England would cut interest rates four times this year, reducing the headline rate from 4.75% to 3.75%.

Until last week, financial markets were betting on only two rate cuts, though a fall in inflation to 2.5% and figures showing weak retail sales before Christmas have increased the odds of at least three reductions this year.

A spokesperson for the IMF said Labour’s budget rules showed the government was committed to bringing down the UK debt over the longer term.

The chancellor, Rachel 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.

She added: “I will go further and faster in my mission for growth through intelligent investment and relentless reform, and deliver on our promise to improve living standards in every part of the UK through the plan for change.”

Germany was expected to recover from a two-year period of contraction with a 0.8% growth rate in 2025, but the forecast was downgraded in the latest assessment to just 0.3%. France is predicted to grow by 0.8% after a 0.3 percentage point downgrade.

Next year, the UK is on course to grow by 1.6%, topping France, Germany and Italy for a second successive year.

The IMF’s World Economic Outlook predicted global growth would remain weaker than its pre-pandemic level, but said there was the prospect of a steady rate of expansion this year and next of 3.3%.

Basing his assessment on current policies, the IMF chief economist, Pierre-Olivier Gourinchas, said a period of stability would “draw to a close the global disruptions of recent years, including the pandemic and Russia’s invasion of Ukraine, which precipitated the largest inflation surge in four decades”.

However, there was an explicit warning to Trump and his economic advisers to resist dramatic policy shifts that would endanger the stability of the US and global economy.

While, the IMF’s health check shows US will maintain its status as the fastest growing G7 economy, with a 2.7% rate of expansion this year and 2.1% next year, this judgment is based on policies adopted by the Biden administration.

Gourinchas said steep tax cuts could stimulate growth but at the risk of forcing the US Federal Reserve to prevent an inflationary spiral by raising interest rates. Washington would also need to borrow to fund the tax cuts, increasing US debt and potentially undermining the status of the dollar as the world’s reserve currency.

Extending the warning to plans for import tariffs and regulation cuts, Gourinchas said: “An intensification of protectionist policies, for instance, in the form of a new wave of tariffs, could exacerbate trade tensions, lower investment, reduce market efficiency, distort trade flows and again disrupt supply chains. Growth could suffer in both the near and medium term, but at varying degrees across economies.”

He added: “An excessive rollback of regulations designed to put limits on risk-taking and debt accumulation may generate boom-bust dynamics for the US in the longer term, with repercussions for the rest of the world.”

The risk of inflation returning – forcing central banks to raise interest rates again – was one of several issues the IMF said could threaten its assessment.

“The risk of renewed inflationary pressures could prompt central banks to raise policy rates and intensify monetary policy divergence. Higher-for-even-longer interest rates could worsen fiscal, financial, and external risks,” it said.