According to the International Monetary Fund (IMF), the UK economy is set for a „soft landing”, growing faster than previously expected following last year’s recession.
However, the World Bank stressed that ambitious structural reforms to improve living standards are „urgently needed” ahead of general elections later this year.
It also warned against pre-election tax cuts and hinted that the government could bring in more funding from taxes linked to carbon use or road vehicles.
The IMF said in a new report on the health of the UK economy that the country’s gross domestic product (GDP) will increase by 0.7% in 2024, following growth of 0.6% in the first quarter.
This represents an improvement from the IMF’s previous forecast of 0.5% growth for the year.
The IMF said on Tuesday it expects growth of 1.5% in 2025 – in line with its previous forecast – as real incomes are supported by lower inflation and easing of broader financial conditions.
However, the UK economy’s long-term growth prospects remain „unhinged” due to weaker labor productivity and higher-than-expected idleness due to illness.
This comes after the UK economy fell into recession in late 2023, with declines of 0.1% and 0.3% in the third and fourth quarters respectively.
Growth stalled due to high borrowing costs, with UK interest rates rising to 5.25% in an attempt to control rising inflation.
UK CPI (consumer price index) inflation fell to 3.2% in March – the lowest since September 2021 – and is expected to move closer to the Bank of England’s 2% target rate when new data comes out on Wednesday.
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As a result, economists predict that the bank will start cutting interest rates in the coming months.
The IMF said: „The UK economy is approaching a soft landing, following a mild technical recession in 2023 as growth recovers faster than expected.
„CPI inflation has fallen faster than expected last year and is expected to return to target by early 2025.”
The IMF said on Tuesday that ahead of an election where both parties will focus on the economy, „hard choices” will need to be made in the coming years to „put significant pressure on public services and critical investment and to stabilize public debt”. .
It added: „This could be achieved, for example, through higher carbon and road-use taxation, broadening VAT and inheritance tax bases and raising additional revenue from capital gains and property taxation”.
As a result, the IMF said it „advises against further tax cuts” against this economic backdrop, which is far from clear that they will reliably 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 has upgraded our growth for this year and predicts that we will grow faster than any other major European country over the next six years – so it’s time to shake off any unjustified pessimism about our prospects.”
Earlier this month, the Organization for Economic Co-operation and Development (OECD) cut its UK growth forecasts for 2024 and 2025, indicating that next year will see the weakest growth in the G7 group of major economies.
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