The UK economy is set for a “soft landing” as it grows faster than previously expected following recession last year, according to the International Monetary Fund (IMF).
However, the global financial agency stressed that ambitious structural reforms to improve living standards “are urgently needed” ahead of a general election later this year.
It also cautioned against any pre-election tax cuts and indicated Government could bring in more funds from taxes linked to carbon usage or road vehicles.
The IMF said in a new report on the health of the UK economy that GDP (gross domestic product) in the country is expected to grow by 0.7% for 2024, following 0.6% growth over the first quarter.
It represents an upgrade from the IMF’s previous prediction of 0.5% growth for the year.
The IMF said on Tuesday that it then expects growth of 1.5% in 2025 – in line with its previous forecast – as real incomes are supported by slowing inflation and easing wider financial conditions.
Nevertheless, the UK economy’s longer-term growth prospects “remain subdued” due to weak labour productivity and higher-than-expected inactivity levels due to illness.
It comes after the UK economy fell into recession over the latter half of 2023, with declines of 0.1% and 0.3% in the third and fourth quarters respectively.
Growth had stalled in the face of higher borrowing costs, with UK interest rates increased to 5.25% in a bid to grapple soaring inflation.
UK CPI (consumer price index) inflation cooled to 3.2% in March – its lowest since September 2021 – and is expected to move close to the Bank of England’s 2% target rate when fresh data is revealed on Wednesday.
As a result, economists are predicting that the Bank will start reducing interest rates in the coming months.
Bank of England governor Andrew Bailey said he did not know what the upcoming inflation figure was, but did expect “quite a drop in the number”.
Speaking at an event hosted by The London School of Economics on Tuesday, Mr Bailey said: “We reduced our forward-looking view on the level of inflation persistence, and which is in good part why we ended up with the forecast that the market interest rate curve is below the target at the three-year horizon.
“To my mind, that is important on conditioning our thinking about rates going forwards.
“The IMF gave us this great wisdom that the IMF can… I think it’s important in sort of, in a sense, setting the scene for our thinking.”
The IMF said: “With growth recovering faster than expected, the UK economy is approaching a soft landing, following a mild technical recession in 2023.
“CPI inflation has fallen faster than was envisaged last year and is projected to return durably to target in early 2025.”
The IMF also said on Tuesday that “difficult choices” will need to be made over the coming years to “stabilise public debt, given significant pressure on public services and critical investment” ahead of an election where both parties are expected to focus on the economy.
It added: “This could be achieved, for example, by raising additional revenue from higher carbon and road-usage taxation, broadening the VAT and inheritance tax bases, and reforming capital gains and property taxation”.
As a result, the IMF also said it “would advise against additional tax cuts” against this economic backdrop, unless it was clear they would credibly drive economic growth.
Chancellor of the Exchequer Jeremy Hunt said: “Today’s report clearly shows that independent international economists agree that the UK economy has turned a corner and is on course for a soft landing.
“The IMF have upgraded our growth for this year and forecast we will grow faster than any other large European country over the next six years – so it is time to shake off some of the unjustified pessimism about our prospects.”
Earlier this month, the Organisation for Economic Co-operation and Development (OECD) downgraded its UK growth projections for 2024 and 2025, indicating it will witness the weakest growth across the G7 group of major economies next year.