Rachel Reeves (Image: Getty)
Rachel Reeves faces fresh humiliation over the economy after the International Monetary Fund downgraded Britain’s growth outlook. The IMF forecast growth of just 1.1% in 2025, 0.5% down from its previous outlook.
It is a fresh blow for the Chancellor and comes as Donald Trump’s tariff wars deliver a severe hit to the global economy. The outlook for 2026 has also been downgraded, from 1.5% to 1.4%.
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Weak growth presents Ms Reeves with a major headache as she tries to meet her fiscal targets without having to hike taxes or cut spending at her next Budget in the autumn.
The highly anticipated report comes after Mr Trump’s tariff announcements sparked global market turmoil – including a rise in the cost of UK borrowing as yields on government bonds, known as gilts, climbed.
The Chancellor said the forecast “shows that the UK is still the fastest growing European G7 country”.
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But there was no acknowledgement of the growth downgrade or the sharp rise in IMF estimates for UK inflation.
Ms Reeves added that the World Economic Outlook (WEO) report “clearly shows that the world has changed, which is why I will be in Washington this week defending British interests and making the case for free and fair trade”.
The report blames the UK downgrade on “recent tariff announcements, an increase in gilt yields and weaker private consumption amid higher inflation”.
It comes as a major embarrassment to Prime Minister Keir Starmer after he repeatedly pledged to boost growth in Britain’s economy.
It also points to a bleaker picture for the cost of living.
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Tax hikes and imposed price increases on water, energy and other public services – partly driven by the climate change agenda – are expected to lead to a sharp 0.7% rise in inflation to 3.1% this year.
This will make it harder for the Bank of England to deliver the interest rate reductions required to boost consumer confidence, the housing market and business investment.
Shadow Chancellor, Mel Stride, said: "The latest IMF outlook is a worrying indictment of Labour’s economic approach. Less than a year into their government, Britain is already seeing the consequences of Labour’s high-tax, high-spend agenda.
"The IMF has downgraded the UK’s growth forecast, raising serious concerns about the lack of confidence and direction under Labour. They have also revised up significantly their forecast for inflation. At a time when families are looking for stability and support, Labour’s policies are stifling growth, pushing up the cost of living and leaving us vulnerable to external shocks.
"This government inherited the fastest growing economy in the G7 and inflation was bang on target. Instead of building on that progress, Labour is taking Britain backwards with reckless spending, higher inflation and no credible plan for growth.
"Under Kemi Badenoch's leadership, the Conservative Party will fight for a stronger, lower-tax economy that rewards hard work, encourages investment, and delivers for the British people."
Despite the growth downgrade Britain will still be among the fastest expanding countries among the Group of Seven richest nations.
It is predicted to be way ahead of competitors in Germany, France and Italy, which will stagnate in 2025 with no signs of any upturn until 2026.
Global trade growth projections have been slashed by 1.5% since the previous World Economic Outlook.
The IMF warned over the increased risk of a trade war, which would particularly hit China and the US but also many countries in Asia and Europe.
At the same time, heightened uncertainty around trade policy has also weakened the overall outlook, with many global firms likely to react to tariffs by suspending or reducing investments and cutting spending.
Banks may also slow lending to businesses while they assess how exposed borrowers will be to the new trade environment.
“The combined increased uncertainty and resulting tightening of financial conditions are a global negative demand shock and will weigh on activity,” Mr Gourinchas said.
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The global economy is being “severely tested” with the risk that trade retaliation may ratchet up tensions, while financial markets could continue to react sharply to lower growth prospects.
However, the IMF said there is also the opportunity for more positive consequences depending on how countries work together and address the new challenges.
“If countries de-escalate from their current tariff stance, and co-ordinate to deliver clarity and stability on trade policy, the outlook could immediately brighten,” Mr Gourinchas said.