The UK economy will grow faster than previously thought this year, according to an upgraded outlook by the International Monetary Fund in a boost to the chancellor, Rachel Reeves, ahead of her first budget next week.
In a significant revision of the Washington-based organisation’s biannual economic review, UK growth in 2024 is expected to be 1.1%, up from a projection of 0.7% in July. The IMF’s forecast for 1.5% growth next year was unchanged.
Reeves, who is due to join finance ministers and central bank governors on Thursday at the IMF’s annual meeting in the US capital, has made economic growth the centrepiece of Labour’s plans over the next five years.
She is expected to unveil a big increase in infrastructure investment when she delivers the budget on 30 October in a break with the much-reduced capital spending plans put in place by the previous Conservative administration.
The IMF said in its latest World Economic Outlook report that nations such as the UK that depend on services had grown strongly this year, leaving behind those including Germany that were more reliant on selling manufactured goods.
The UK is expected to be the joint third fastest-growing economy in the G7 this year, in line with France and behind the US which is on course to grow by 2.8% and Canada, which is forecast to grow by 1.3%. Italy lags behind with 0.7% growth, Japan with 0.3% and zero growth in Germany.
The IMF said UK growth would pick up to 1.5% in 2025, as falling inflation and interest rates stimulate domestic demand.
Reeves said: “It’s welcome that the IMF have upgraded our growth forecast for this year, but I know there is more work to do.
“That is why the budget next week will be about fixing the foundations to deliver change, so we can protect working people, fix the NHS and rebuild Britain.”
Pierre-Olivier Gourinchas, the IMF’s chief economist, said Europe was on a steady and improving path but growth remained lower than in the decades leading up to the 2008 financial crash.
He said the global economy had remained “unusually resilient throughout the disinflationary process” of the last two years when central banks raised borrowing costs to calm spiralling prices.
“Monetary policy played a decisive role by keeping inflation expectations anchored, avoiding deleterious wage-price spirals, and a repeat of the disastrous inflation experience of the 1970s,” he said, adding: “The decline in inflation without a global recession is a major achievement.”
Gourinchas said he was concerned about the potential for policy mistakes to hold back growth. He highlighted how central banks may be too slow to reduce the cost of borrowing now that inflation has fallen back and for trade wars to ignite.
The IMF leadership is known to be concerned that a Trump victory at the US presidential election on 5 November will lead to a slowdown in global trade.
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Trump has outlined plans to impose significant tariffs on imported goods, a policy that is likely to trigger a series of tit-for-tat measures. China is expected to be his main target, though goods from the European Union could also be in his sights.
“Shifts toward undesirable trade and industrial policies can significantly lower output relative to our baseline forecast,” said Gourinchas.
Global growth is projected to hold steady at 3.2% in 2024 and 2025, “but some low-income and developing economies have seen sizeable downside growth revisions, often tied to intensifying conflicts,” he added.
Many developing world countries had escaped high death tolls during the pandemic, but suffered from escalating food and energy prices and high interest rates on their debts.
Gourinchas said the defeat of inflation meant there was an opportunity to bring down interest rates and reduce government spending deficits, placing greater emphasis on the private sector to play a larger role in spurring economic growth.