The United Kingdom has received a modest upgrade to its economic growth forecast for this year, now pegged at 1.3%. The Chancellor noted this as a positive sign, pointing to Britain’s strong performance within the G7. Over the year, the UK is expected to be the second fastest-growing economy in the group, behind only the United States.
However, this encouraging news is paired with a severe warning on inflation. A new report from a top global economic watchdog projects that UK inflation will climb to the highest level among G7 nations in both 2025 and 2026. The forecast for next year has been revised up to 3.4%, posing a significant challenge for households and the Bank of England.
The report’s chief economist highlighted that while some factors boosting UK inflation are temporary, underlying risks remain. Strong wage growth and rising inflation expectations among households and firms suggest a belief that high prices are becoming entrenched. This has led to advice that the Bank of England should be “very cautious” about cutting interest rates.
These domestic challenges are set against a global backdrop of “unexpected resilience” but a “dim” future. The world economy’s growth forecast for this year has been lifted to 3.2%, largely because the feared impact of US-led tariffs has been delayed rather than averted. The full effects are still expected to filter through and dampen investment.
Beyond trade, the report expresses concern over restrictive immigration policies and frothy financial markets. A US crackdown on immigration is seen as a direct threat to its own GDP, while “stretched valuations” in AI-related stocks pose a risk of a sharp market downturn that could derail investment and broader economic growth.
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