IMF upgrades UK 2026 growth forecast to 1% but warns of Iran war and domestic uncertainty risks

The International Monetary Fund upgraded its 2026 growth forecast for the UK to 1% from 0.8%, citing more momentum than expected after the economy grew 0.6% in the first three months of the year, led by a rebound in retailing and construction. The IMF said the UK had entered the latest global shock with "more momentum than expected" and "remained resilient," but warned that a prolonged Iran conflict risked hitting growth and resulting in "higher energy and food prices."

"Domestic uncertainty could also add to the already volatile global environment, holding back consumption and investment decisions," the IMF added. The upgrade follows figures released last week showing the UK economy grew 0.6% in the first quarter of 2026, defying the initial impact of the Iran war.

The IMF said inflation would increase "temporarily" due to higher energy prices, noting that because the UK imports more energy than it produces domestically, it is more sensitive to rapid rises in global prices. However, the IMF suggested the Bank of England does not need to raise interest rates, currently at 3.75%, this year in response. "Holding rates for the remainder of the year should be sufficient to bring inflation back to target (2%) by end-2027," it said.

Chancellor Rachel Reeves welcomed the upgrade as "proof" the government has the "right economic plan." "The choices I have made as chancellor mean our economy is in a stronger position as we deal with the costs of the war in Iran," she said. The IMF did not address the political turmoil that engulfed the government last week following poor local election results for Labour, but said any "domestic uncertainty" could impact growth alongside the Iran conflict.

Luc Eyraud, the IMF's mission chief to the UK, said markets and investors put a premium on predictable government policy. "Today's policymaking is constrained by a more volatile external environment with more frequent and overlapping shocks, a rising public interest bill, in part reflecting market concerns with countries' elevated debt, and the long-standing challenge of weak productivity growth," he said.

The IMF said the "long term scope" for further tax rises was "becoming limited unless fundamental tax reforms are envisaged" and there were "difficult choices" over rising pressures from spending on ageing, defence and the climate transition over the next 20 years. It suggested the "scale of rising spending pressures and limited tax space" implied spending "restraint" would be needed in the longer term, such as replacing the triple lock for state pensions. The IMF said any household support package for higher energy prices should be targeted and time limited.

The chancellor is expected to outline some cost of living support measures later this week, including a possible cancellation of a planned 5p rise in fuel duty in September.