The International Monetary Fund upgraded its growth forecast for the UK economy to 1.3 percent in 2026, up from a 1 percent prediction made in July. The revision reflects better-than-expected global economic performance, driven partly by surging investment in artificial intelligence despite disruptions to Middle Eastern energy production from the US-Israel war with Iran.

The IMF expects the UK to experience the second-fastest growth in the Group of Seven this year alongside Germany. However, the fund slightly downgraded its forecast for next year, anticipating that elevated energy prices and higher interest rates will dampen consumer spending and business investment.

The IMF identified a bright spot in the UK's fiscal position. The country stands out among major economies for addressing government borrowing concerns. By 2031, the UK is projected to hold the lowest annual borrowing among G7 nations, which include Canada, France, Germany, Italy, Japan and the US. Sir Howard Davies, former deputy governor of the Bank of England, attributed this progress to the UK government's majority status and commitment to tackling deficits through tax rises, spending cuts, or a combination of both. By contrast, Davies noted the US has offered little on deficit reduction, while France and Germany lack majority governments.

Davies cautioned against reading too much into the UK's relative performance. "We're still growing slowly. It's almost like saying we're winning a slow bicycle race here because other people are going backwards a bit more rapidly than we are," he said.

Inflation remains a headwind. The IMF forecasts UK inflation will average 3.3 percent this year and raised its estimate for next year to 2.8 percent from a previous prediction of 2.4 percent. Tim Armitage, investment strategist at Quilter Cheviot, said the Bank of England will likely raise interest rates at least once this year, with additional increases expected in 2025.

The IMF noted that while the UK absorbed the economic fallout from the Iran war better than expected so far, this resilience will fade as higher energy prices and elevated interest rates take effect on household spending and corporate investment.