IMF Boosts UK Growth Outlook Amid Inflation Ease and Rate Cuts

The International Monetary Fund (IMF) has upgraded its growth outlook for the UK, citing lower inflation and expectations of interest rate cuts. The IMF's latest assessment, released on May 21, 2024, reflects a more positive outlook for the UK economy, with real GDP growth now forecast at 0.7 percent in 2024 and 1.5 percent in 2025. This upgrade comes as a result of the UK's rapid disinflation, particularly in energy and goods prices, which has contributed to a more favorable economic environment.

The IMF's report highlights the UK's successful navigation through a mild technical recession in 2023, with growth recovering faster than expected. This recovery can be attributed to the rapid decline in inflation, which has fallen from double-digit levels last year to near the Bank of England's 2 percent target. The IMF expects inflation to temporarily rise to 2.5 percent by the end of 2024 due to regulated energy price base effects but to return durably to 2 percent in early 2025.

The IMF's positive assessment of the UK's economic prospects is also influenced by the country's fiscal policy, which has remained tight, targeting medium-term debt stabilization. The IMF acknowledges that the last two budgets included tax cuts aimed at boosting investment and labor supply, which have contributed to the improved growth outlook. However, the IMF emphasizes that stabilizing public debt will require difficult tax and spending choices, particularly in the face of significant pressures on public services and critical investment needs.

The IMF's upgrade of the UK's growth outlook is also driven by the country's banking system's health and the management of risks from non-bank financial institutions (NBFIs). The IMF notes that the banking system remains healthy, but continued vigilance is warranted. Maintaining progress on initiatives to better assess and mitigate risks stemming from NBFIs is crucial for sustaining the UK's economic recovery.

In addition to fiscal policy and banking system health, the IMF highlights the importance of structural reforms in boosting the UK's economic potential and living standards. The IMF recommends bold implementation of ambitious growth-enhancing reforms and AI adoption to address challenges such as weak labor productivity and higher than expected inactivity levels due to long-term illness. These reforms, along with initiatives to ease planning restrictions and address skills shortages, are essential for achieving the UK's ambitious emission reduction targets and realizing its climate policies.

The IMF's upgrade of the UK's growth outlook reflects the country's successful navigation through economic challenges and its commitment to sustainable policies. As the UK braces for the center-left Labour Party's first budget in 14 years, the IMF's assessment serves as a reminder of the importance of continued fiscal discipline, structural reforms, and a healthy banking system in driving economic growth and prosperity.