The rise of artificial intelligence is driving an increase in economic growth in the UK, new forecasts from the International Monetary Fund have shown handing a boost to chancellor John Healey ahead of his first budget.
The new report indicates that Britain’s economic outlook has improved more than almost any other major economy over the past six months.
In its latest World Economic Outlook, the IMF said UK GDP is set to grow by 1.3 per cent in 2026 — an upgrade of 0.5 points from its April forecast, despite the energy shock triggered by the war in Iran war having lasted longer than expected.
The upgrade comes as a result of the UK being seen as one of the winners of the AI boom, with the only other G7 economy whose outlook as improved as much since April being Germany.
However, the report also warned that British households face a steeper increase in inflation than earlier predictions suggested, driven by escalating energy and food costs linked to conflict in the Middle East.
Updated projections also indicate that prime minister Andy Burnham will see UK economic growth slow down over the coming year.
The global financial institution stated that price pressures will continue to gather pace internationally into next year as war disrupts energy supplies.
An extended stalemate or worsening crisis in the Middle East could "keep energy and food prices elevated and volatile", dampening expansion and weakening government fiscal positions, the IMF said.
It added that these risks could be compounded by extreme weather, cyber attacks, and targeted strikes on energy infrastructure.
The warnings were echoed by the Institute for Fiscal Studies (IFS), which said the most pressing problem for Mr Healey identified ahead of the Budget on October 28 is that inflation will erode the budgets of government departments, creating the need for either large cuts to some public services or potential top ups to spending plans totalling tens of billions of pounds.
The latest world economic outlook showed that UK consumers are set to witness faster-than-expected inflation for this year and 2027.
Consumer prices are set to have increased by 3.3 per cent in 2026, up from a previous prediction of 3.2 per cent. This would mark the joint second-highest rate among the G7 group of countries.
Meanwhile, inflation is expected to slow to 2.8 per cent for next year, but this is significantly higher than the 2.4 per cent rate previously forecast by the IMF.
Most recent figures from the Office for National Statistics (ONS) showed that inflation increased to 3.1 per cent in August and is expected to tick higher over the coming months, amid pressure from higher household energy bills.
The Bank of England has said it expects UK inflation to lift to “slightly above 4 per cent” in the first quarter of 2027, partly linked to another increase in the household energy price cap in January.
However, inflation is then expected to swing back lower throughout the year.
The IMF said it expects core UK inflation to fall back to target levels by the end of this year, later than it had previously forecast.
Globally, inflation is expected to lift to 4.7 per cent in 2026 and then slow to 4.1 per cent in 2027, although this would be 0.2 percentage points higher than its previous predictions.
The report, which was released alongside annual meetings from the IMF and World Bank in Bangkok, also pointed to stronger-than-expected UK growth for this year.
UK gross domestic product (GDP) is set to grow 1.3 per cent this year, having previously predicted a 1 per cent rise.
However, growth for next year is set to slow to 1.2 per cent, down from a previous forecast of 1.3 per cent.
An upwards boost from the adoption of AI technology has helped to boost many economies globally this year.
However, the IMF indicated that accelerating prices and further disruption linked to the Middle East conflict are likely to weigh on growth.
The latest report also indicated that the shock to the labour market has been shallower than expected, with UK unemployment set to strike 5.3 per cent this year, down from a prediction of 5.6 per cent.
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