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The IMF has reduce Britain’s development prospects for 2026 by greater than some other G7 nation because the fund warns that the nation faces a heavy blow from the worldwide vitality disaster.
GDP will develop 0.8 per cent this yr, 0.5 share factors under the IMF’s earlier forecast in January, based on its newest World Financial Outlook. Consequently, unemployment can be pushed in direction of its highest degree in over a decade.
Chancellor Rachel Reeves will painting the UK as a “secure haven” amid geopolitical volatility as she travels to Washington for the conferences this week. However her makes an attempt to advertise the nation’s sights for worldwide funding will conflict with a downbeat outlook for the UK’s financial system.
Reeves on Tuesday dubbed the US-Israeli invasion of Iran “a folly”, in a hardening of the British authorities’s criticism of the struggle.
In its World Financial Outlook revealed on Tuesday, the IMF singled out the UK as one of many nations set to endure a “massive detrimental impact” from the vitality disaster because it lowered its UK development forecast for this yr and subsequent.
The discount for 2026 was the steepest of any G7 nation. The forecast for 2027 was trimmed by 0.2 share factors to 1.3 per cent.
The unemployment price would attain 5.6 per cent this yr, the IMF predicted, properly above the newest studying of 5.2 per cent within the November-to-January interval, and a pointy improve on the fund’s earlier predictions. That will put joblessness on the highest price since 2015.
There are two key causes for the steep GDP development downgrade, IMF chief economist Pierre-Olivier Gourinchas mentioned in an interview with the FT.
The primary was the very “gas-intensive” nature of the UK vitality combine, given the fossil gas’s significance for heating houses and in figuring out electrical energy costs.
On high of this, the GDP forecast was pushed by weak development knowledge within the second half of 2025, which is weighing down the outlook this yr. UK output grew simply 0.1 per cent within the third and fourth quarters of 2025.
The UK’s predicted development price for this yr is much like the expansions predicted for Germany and France, however properly under the two.3 per cent development forecast for the US.
The IMF downgrade follows an analogous verdict from the OECD last month, which slashed its development outlook for the UK by greater than for some other G20 nation. The IMF’s new forecasts present steeper downgrades for G20 members Saudi Arabia and Turkey.
Inflation within the UK is anticipated to choose up briefly in direction of 4 per cent earlier than returning to the Financial institution of England’s 2 per cent goal by the top of 2027 as the consequences of upper vitality costs fade and the roles market weakens, the IMF mentioned.
The fund’s full-year 2026 forecast for inflation was raised to three.2 per cent, properly above its October prediction of two.5 per cent shopper worth development, adopted by inflation of two.4 per cent in 2027.
Reeves mentioned that “no wise particular person” supported the Iranian regime however she additionally immediately criticised Washington for its lack of strategic goals.
“To start out a battle with out being clear what the targets are and never being clear about how you’ll get out of it, I do suppose that could be a folly and it’s one that has effects on households right here within the UK but additionally households within the US and around the globe,” she advised the Every day Mirror.
Regardless of buyers betting that the BoE is ready to lift charges a minimum of as soon as this yr, Gourinchas mentioned the IMF anticipated UK financial coverage to be stored on maintain in 2026. The BoE subsequent pronounces its rate of interest resolution on April 30.
Given the financial system’s weak spot, the central financial institution will go on to decrease rates of interest 3 times in 2027 from the present 3.75 per cent, the fund predicted.
Central banks can usually “look by means of” an energy-price surge so long as inflation expectations stay properly anchored, Gourinchas mentioned in a weblog submit.
“But when medium- or long-term inflation expectations drift up as costs and wages decide up, restoring worth stability should take priority over near-term development, with a swift tightening.”
In an announcement, Reeves mentioned: “The struggle in Iran will not be our struggle, however it would come at a price to the UK. These will not be prices I wished, however they’re prices we should reply to.”
