IMF lifts UK growth forecast this year
Newsflash: The International Monetary Fund has lifted its forecast for UK economic growth this year.
Following an annual check-up on the British economy, the IMF has upgraded the UK’s expected growth rate this year to 1.2% from 1.1%, and reassured us that an “economic recovery is under way”.
This reverse some of the IMF’s downgrade last month, when it cut the UK’s predicted growth this year from 1.6% to 1.1%.
It follows the UK economy’s decent start to 2025, with growth of 0.7% recorded in the January-March quarter.
Luc Eyraud, the IMF’s mission chief to the United Kingdom, told reporters in London this morning:
“These revisions reflect the strong GDP performance in the first quarter, reflecting the resilience of the UK economy despite the complex external environment.”
However, looking ahead, the IMF also warns that trade tensions linked to US tariff plans will reduce UK economic growth next year.
It expects global trade tensions will wipe 0.3 percentage points off growth for the year, but is still predicting growth will increase to 1.4% in 2026.
Trade tensions will weigh on growth through “persistent uncertainty, slower activity in UK trading partners, and the direct impact of remaining US tariffs on the UK”, the IMF warns.
Key events
US durable goods orders drpo
Over in the US, meanwhile, demand for durable goods has dropped amid the economic uncertainty caused by the Trump trade wars.
Orders for durable goods — items meant to last at least three years — fell 6.3% in April, driven by weaker demand for commercial aircraft.
April durable goods orders (blue) -6.3% m/m vs. -7.8% est. & +7.6% prior (rev down from +9.2%) … orders ex-transportation +0.2% vs. 0.0% est. & -0.2% prior pic.twitter.com/Xfy2iDvmtD
— Liz Ann Sonders (@LizAnnSonders) May 27, 2025
Core capital goods orders- which strip out volatile items such as aircraft orders – decreased by 1.3% last month, new data from the US commerce department shows.
Despite lifting its forecast for UK growth a little for 2025, from 1.1% to 1.2%, the IMF also warns that growth risks “remain to the downside”.
One reason is the US trade war. The IMF says:
Tighter-than-expected financial conditions, combined with rising precautionary saving by households, would hinder the rebound in private consumption and slow the recovery. Persistent global trade uncertainty could further weigh on UK growth, by weakening global economic activity, disrupting supply chains, and undermining private investment.
In today’s assessment of the UK economy, the IMF also suggest further tax rises may be needed to balance the books.
The Fund argues that it is important to “stay the course and reduce fiscal deficits as planned over the medium term.”
Risks to that strategy include high global uncertainty, volatile financial market conditions, and the challenge of containing day-to-day spending, they say, and warn:
Materialization of these risks could result in market pressures, put debt on an upward path, and make it harder to meet the fiscal rules, given limited headroom. To this end, staff recommends adhering to the current plans, and implementing additional revenue or expenditure measures as needed if shocks arise, to maintain compliance with the rules.
The UK also gets a hat-tip from the IMF for the trade deals announced in the last few weeks.
The Fund says:
Policy stability is critical to support business confidence in an increasingly uncertainty global environment.
In this context, recent efforts to strike trade agreements with key partners, including the EU, India, and the US, demonstrate the authorities’ commitment to finding common ground and establishing a more predictable environment for UK exporters.
IMF: Bank of England should ease monetary policy gradually
On monetary policy, the IMF recommends that the Bank of England continues to ease interest rates “gradually”, while remaining flexible due to elevated levels of uncertainty.
The Fund says:
The pickup in inflation that began in 2024 is expected to last through the second half of this year, with a return to target later in 2026 as underlying inflationary pressures continue to recede.
Although monetary policy calibration has become more difficult due to still-weak growth, the temporary rise in inflation and high long-term interest rates, staff sees the BoE’s gradual pace of easing as appropriate.
Given the elevated uncertainty, the MPC is encouraged to retain flexibility to adjust the monetary stance in either direction if needed.
The IMF also applauds Rachel Reeves’s recent changes to the fiscal rules, saying they “enhance its credibility and effectiveness”.
But… the Fund also suggests the chancellor could “promote further policy stability” by having only one Office for Budget Responsibility assessment of her self-imposed fiscal rules each year, at the time of the Budget, rather than the current twice-yearly review.
The Financial Times reports that this idea is under discussion in the Treasury, “according to several well-placed officials”.
IMF: Rachel Reeves should ease fiscal rules
Phillip Inman
In what looks like a significant intervention, the International Monetary Fund is recomending that Rachel Reeves loosens her fiscal rules to prevent the need for emergency spending cuts.
Adding to the clamour from backbench Labour MPs incensed by the government’s welfare cuts, the Washington-based organisation said the chancellor should examine ways to avoid making short-term savings when there is a downturn in economic forecasts, my colleague Phillip Inman reports.
An easing of to the fiscal rules would potentially give the chancellor more breathing space on potential spending cuts.
The IMF said the current system inherited from the previous Conservative government of twice-yearly assessments of the public finances by the Office for Budget Responsibility (OBR) was ripe for an overhaul.
It said:
“There is still significant pressure for frequent fiscal policy changes, given that small revisions to the economic outlook can erode the headroom within the rules, which is the subject of intense market and media scrutiny.”
The IMF said Reeves could downgrade the significance of spring OBR report, give a broader outlook for the public finances – “de-emphasising” the single cash figure for spending headroom – or “establish a formal process so that small rule breaches do not trigger corrective fiscal action outside of the single fiscal event”.
The Chancellor of the Exchequer, Rachel Reeves, has responded to the IMF’s upgraded growth forecast for 2025, saying:
“The UK was the fastest growing economy in the G7 for the first three months of this year and today the IMF has upgraded our growth forecast.
We’re getting results for working people through our Plan for Change – with three new trade deals protecting jobs, boosting investment and cutting prices, a pay rise for three million workers through the National Living Wage, and wages beating inflation by £1,000 over the past year.”
IMF lifts UK growth forecast this year
Newsflash: The International Monetary Fund has lifted its forecast for UK economic growth this year.
Following an annual check-up on the British economy, the IMF has upgraded the UK’s expected growth rate this year to 1.2% from 1.1%, and reassured us that an “economic recovery is under way”.
This reverse some of the IMF’s downgrade last month, when it cut the UK’s predicted growth this year from 1.6% to 1.1%.
It follows the UK economy’s decent start to 2025, with growth of 0.7% recorded in the January-March quarter.
Luc Eyraud, the IMF’s mission chief to the United Kingdom, told reporters in London this morning:
“These revisions reflect the strong GDP performance in the first quarter, reflecting the resilience of the UK economy despite the complex external environment.”
However, looking ahead, the IMF also warns that trade tensions linked to US tariff plans will reduce UK economic growth next year.
It expects global trade tensions will wipe 0.3 percentage points off growth for the year, but is still predicting growth will increase to 1.4% in 2026.
Trade tensions will weigh on growth through “persistent uncertainty, slower activity in UK trading partners, and the direct impact of remaining US tariffs on the UK”, the IMF warns.
UK retail sentiment plummets as sales volumes keep falling
Ouch. Confidence among British retailers has fallen at the sharpest pace in five years.
The latest healthcheck on UK retailing from the CBI shows that a decline in sales volumes gathered pace this month, and that stores expect conditions to worsen.
The CBI’s quarterly gauge of business sentiment has dropped at its fastest rate since May 2020 this month. A net balance of -29% of firms expect their business situation to worsen over the coming three months, compared with -19% in February.
Sentiment amongst retailers plummeted in May at the sharpest rate in five years, with firms expecting their business situation to worsen over the coming quarter. pic.twitter.com/RRzmI91N3X
— CBI Economics (@CBI_Economics) May 27, 2025
The CBI’s monthly gauge of how retail sales compared with a year earlier fell to -27 this month – the lowest since March – from -8 in April, which had been its highest since October.
A measure of expected sales for June fell to -37, the lowest since February 2024.
The CBI’s latest quarterly Distributive Trades Survey found that retail sales fell in the year to May. Retailers expect sales to decline at a faster rate next month. pic.twitter.com/yG0qXK4rvB
— CBI Economics (@CBI_Economics) May 27, 2025
Ben Jones, lead economist at the CBI, says:
“This was a fairly downbeat survey and highlights some of the challenges facing the retail and wider distribution sector. In contrast to other recent retail data, this survey suggests parts of the sector are still struggling with fragile consumer demand, though online sales seem to be holding up better.”
However, the official retail sales figures from the Office for National Statistics have been more optimistic laterly – they’ve shown a rise in sales volumes in recent months, helped by sunny weather.
EU economic sentiment improves in May
Economic sentiment across Europe has risen this month, the latest data from the European Commission shows.
The EC’s economic sentiment indicator (ESI) has improved in both the EU (+0.6 points to 95.2) and the euro area (+1.0 points to 94.8).
That’s an encouraging pick-up, following two months of declines, but both gauges are still below their long-term average.
The EC reports that:
The rise in the ESI for the EU was primarily driven by a partial rebound of confidence in the retail trade sector and among consumers, with a moderate contribution also from the construction sector. Confidence in both the industry and services sectors remained broadly stable.
Among the largest EU economies, the ESI increased in Italy (+2.8) and in Germany (+1.5), but fell in France (-3.5), the Netherlands (-0.8), Poland (-0.6), and Spain (-0.4).
Relief that trade tensions between the US and Europe have abated is pushing down the gold price.
Gold has fallen by 1.3% to $3,297 per ounce, away from the record highs touched earlier this year.
DAX hits record high
Relief that Donald Trump has delayed new higher tariffs on EU imports has pushed Germany’s DAX share index up to a new record high!
The DAX has touched a new peak of 24,161 points this morning, up around 0.5%. It’s now up around 21% so far this year, outpacing other markets.
FTSE 100 highest since early March
Boom! Britain’s FTSE 100 share index has hit its highest level since early March.
The UK’s blue-chip share index has risen over the 8,800 point mark for the first time in two and a half months, up 86 points or almost 1%.
