(Bloomberg) -- The IMF upgraded its growth expectations for the UK by the most in the Group of Seven after the US, affirming a positive economic outlook while cautioning the new Labour government on the need to carefully manage debt.
The British economy will expand 1.1% this year — compared with a previous forecast of 0.7% in July — and 1.5% next year, the International Monetary Fund said on Tuesday as part of its World Economic Outlook. Over the two-year period, the UK is projected to be the third-fastest growing economy, behind the US and Canada.
The improved outlook follows a similar upgrade by the OECD last month and reflects falling inflation and interest rates, which would likely stimulate domestic demand. But the IMF urged countries like the UK, where the national debt is forecast to rise over the next five years, to “stabilize debt dynamics and rebuild much-needed fiscal buffers.”
The forecast lays out the complex landscape confronting Rachel Reeves as the UK’s first female Chancellor of the Exchequer prepares to unveil her inaugural budget next week. While the Labour Party inherited a stronger-than-expected economy in July, the government is borrowing more to cover the costs of the former Conservative administration’s policies, even before implementing Prime Minister Keir Starmer’s promise to rebuild public services.
Reeves is expected to borrow as much as £25 billion ($33 billion) a year extra over the current Parliament’s term, according to projections by Bloomberg Economics. She’s seeking to fund greater investment in roads, railways, housing, schools and prisons in a bid to boost growth and meet a £1 trillion investment gap, as estimated by the Capital Markets Industry Taskforce.
The IMF’s chief economist, Pierre-Olivier Gourinchas, warned in a blog post to accompany the forecasts that countries with unsustainable debt trajectories risked market backlash.
“Success requires implementing a sustained and credible multi-year adjustments without delay, where consolidation is necessary,” Gourinchas wrote. “The path is narrow: delaying consolidation increases the risk of disorderly market-imposed adjustments, while an excessively abrupt turn toward fiscal tightening could be self-defeating and hurt economic activity.”
The IMF expects UK debt to continue to rise to 96.4% of gross domestic product in 2029 from 92.4% next year, using the projections from the March budget as a baseline. Separate figures released by the UK’s statistics agency earlier on Tuesday showed government borrowing already exceeding official forecasts in the first half of the fiscal year.
Reeves plans to find as much as £40 billion of tax rises and spending cuts to pay for an increase in day-to-day departmental budgets. Still, she will likely have to borrow more than was planned in March, Bloomberg Economics forecasts show.
Asked about the UK at an IMF briefing later, Gourinchas said that countries needed to stabilize debt to prepare for future shocks. “That’s when you find yourself, potentially later on, at the mercy of market pressures that will force an adjustment that is uncontrolled to a large extent, at which point you have very few degrees of freedom,” he said.
Any fiscal consolidation, in tax rises and spending cuts, needed to be carefully calibrated over several years to avoid “an adverse impact on growth,” he added.
--With assistance from Irina Anghel, Ramsey Al-Rikabi and Eric Martin.
(Updates to include IMF economists remarks in final paragraph.)
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