The IMF has adjusted its estimate for the UK's growth last year, reflecting a period of stagnation since the Chancellor assumed office in July. The organization now projects that the UK economy will grow by 0.9% in 2024, a decrease from the earlier estimate of 1.1% made three months prior.
Despite this, an increase in public spending is expected to enable the UK to outperform other major European economies this year. The IMF has forecasted a growth rate of 1.6% for 2025, an improvement from the previous prediction of 1.5% in October.
Ms. Reeves, who recently met with Kristalina Georgieva, the IMF’s managing director, to discuss these forecasts, has committed to accelerating efforts to stimulate economic growth.
However, business confidence has significantly declined since Labour's election win in July, with employers expressing concerns that Ms. Reeves's £25 billion National Insurance tax increase will result in higher prices and job losses.
Business leaders have indicated that they will find it challenging to manage the tax increase, which coincides with a substantial rise in the minimum wage starting in July and plans to enhance workers' rights, potentially costing employers up to £5 billion.
The IMF's projections are notably more optimistic than those from economists in the City. JP Morgan has once again lowered its UK growth forecasts this week, now anticipating a growth rate of 0.7% for this year, which is less than half of the IMF's estimate.
Allan Monks, an economist at JP Morgan, remarked, “We believe the risks remain skewed to the downside, based on business survey indicators regarding the private sector's response post-Budget.”
Economists at Barclays project a growth rate of 0.9% for the year, while the Bank of England anticipates a 1.25% expansion of the economy.
Ms. Reeves, the Chancellor, places significant emphasis on growth. A recent increase in gilt yields has diminished much of the £9.9 billion buffer she had established during the Budget, putting her fiscal rules in jeopardy.
If growth continues to disappoint, tax revenues may fall short of expectations, further jeopardizing her financial plans. According to Bloomberg, if her strategies were aligned with current City forecasts rather than the UK’s official growth estimates, she could face a £30 billion shortfall.
Despite these challenges, the UK is projected to outperform other European nations, as the IMF has revised down its growth forecasts for the eurozone over the next two years. The organization cautioned that Europe’s stagnation could potentially lead to a debt crisis.
The anticipated slowdown is expected to be driven by France and Germany, with France grappling with public spending issues and Germany still affected by the repercussions of Russia’s invasion of Ukraine.
Germany is projected to grow by 0.3% this year after experiencing a contraction over the past two years, while France’s economy is expected to increase by 0.8%.
Pierre-Olivier Gourinchas, the IMF’s chief economist, has warned that Europe may fall into a cycle of low growth and high borrowing, even as the European Central Bank accelerates interest rate cuts more rapidly than other developed economies.
The US economy is projected to maintain a strong growth trajectory, with the IMF revising its forecast to 2.7% for this year, driven by sustained domestic demand.
Nonetheless, the IMF cautioned that Donald Trump's commitment to deregulation upon his anticipated return to the White House could lead to a "boom-bust" scenario for the largest economy in the world.
In its most recent outlook, IMF officials indicated that "a significant rollback of regulations aimed at curbing risk-taking and debt accumulation could create boom-bust cycles for the United States in the long run, with implications for the global economy."
Mr. Gourinchas also noted that substantial tax reductions are expected to "increase inflation in the short term," which would "reignite price pressures in the US" and result in prolonged higher interest rates.
In reaction to the IMF's recent projections, Ms. Reeves stated: “The UK is forecast to be the fastest-growing major European economy over the next two years and the only G7 economy, apart from the US, to have its growth forecast upgraded for this year.
“I will go further and faster in my mission for growth through intelligent investment and relentless reform, and deliver on our promise to improve living standards in every part of the UK through the Plan for Change.”