The UK economy is expected to grow by 0.7% this year and 1.5% next year, according to the International Monetary Fund (IMF). The financial agency reported that Britain’s economy is approaching a soft landing—where a central bank’s interest rate hikes slow the economy without triggering a recession.
The IMF noted that economic growth in the UK is recovering faster than anticipated following a mild technical recession in 2023. Inflation has also fallen rapidly from last year’s double-digit levels, nearing the near-term target due to the reversal of the energy price shock and the impact of tight monetary policy.
Currently, inflation is around 2%, but it is expected to temporarily rise to 2.5% by the end of the year due to regulated energy price base effects. However, it is forecast to return to 2% in early 2025.
Despite this positive outlook, the IMF highlighted that longer-term growth prospects remain subdued due to weak labor productivity growth, an aging population, and higher than expected inactivity levels due to long-term illness. These factors are only partially offset by increased migration.
Economic growth could face short-term risks if the anticipated increase in consumption does not occur, or it could exceed expectations if falling energy prices have stronger second-round effects, which could also pose a downside risk to inflation. Additionally, stronger wage pressures may cause more persistent services inflation.
The IMF’s insights come after its Executive Board concluded the Article IV consultation with the UK, providing a comprehensive review of the country’s economic outlook and potential challenges ahead.