UK economy sees light at the end of the tunnel – but tade tensions still loom

While growth still isn’t blazing ahead, the organisation now expects Britain’s economy to grow by 1.2% in 2025, up from its earlier estimate of 1.1%. That might sound like a modest bump, but in economic terms, even a tenth of a percentage point can signal meaningful progress – especially after a stretch of sluggish growth.

This upgrade comes on the back of stronger-than-expected performance at the start of the year, giving analysts and investors some cautious optimism. However, the IMF didn’t hold back in pointing out that things are far from perfect. In fact, it warned that global trade tensions – particularly the spectre of renewed tariffs and economic barriers – could throw a spanner in the works.

Growth Is Picking Up – But Gently

After months of mixed signals, some of the key indicators are finally pointing in the right direction. The UK was the fastest-growing economy among the G7 countries (which includes the likes of the US, Germany and Japan) in the first quarter of 2025. This is partly thanks to falling inflation, resilient consumer spending, and early signs of investment returning to the market.

Chancellor Rachel Reeves welcomed the IMF’s revision, saying it shows the UK is "turning a corner" and on a more stable path. The IMF also acknowledged that the UK’s fiscal policies – essentially how the government is managing its money – strike a healthy balance between promoting growth and keeping debt under control.

But here’s the catch: even as some numbers improve, others are causing concern.

The Tariff Trouble

Perhaps the biggest warning flag raised by the IMF is over trade. While the UK has made progress on softening some trade frictions – such as a new agreement with the United States to ease tariffs on British-made steel, aluminium and electric vehicles – uncertainty still hangs in the air.

The IMF cautions that global trade tensions, especially those related to protectionist measures from major economies like the US and China, could hit the UK hard. According to their analysis, unresolved trade issues could reduce the UK’s GDP by 0.3% by 2026.

That might not seem catastrophic, but it would come at a time when the UK can ill afford any new hurdles. Brexit already complicated trade flows, and new tariffs could impact everything from car manufacturing to the sale of British food and drink abroad.

Productivity: The Persistent Problem

Another key concern the IMF highlighted is the UK’s longstanding issue with productivity – basically, how much value the economy gets out of each hour of work.

Despite improvements in education, technology, and infrastructure, productivity growth in the UK remains stubbornly low compared to countries like Germany or the US. The IMF points to a few reasons for this:

• Businesses are still cautious about investing in new equipment and technology.
• Skills shortages continue to plague certain sectors, particularly manufacturing and health care.
• Public health setbacks and long-term sickness have taken a toll on workforce participation.

Unless these problems are tackled head-on, the IMF says the UK risks "underperforming" over the medium to long term.

What About Interest Rates?

On the monetary policy front, the IMF is urging the Bank of England to tread carefully. Interest rates – which determine how expensive it is to borrow money – have been sitting at relatively high levels to keep inflation in check. But with inflation now easing, the IMF thinks it’s time to gradually lower rates to support growth.

The suggestion? Cut rates by a modest 0.25% every quarter until they settle around 3%, compared to the current 4.25%.

That would be welcome news for anyone with a mortgage or business loan, but policymakers are being cautious. The risk of inflation flaring up again remains, particularly if oil prices rise or if wage demands increase.

So, Where Does That Leave Us?

The takeaway is this: the UK economy is improving, but not by leaps and bounds. The IMF’s latest report offers a bit of sunshine – better-than-expected growth, a solid fiscal position, and signs that inflation is cooling. But the clouds haven’t cleared.

Trade uncertainty and weak productivity are major challenges, and they won’t be solved overnight. The UK government will need to keep working with international partners to ease trade tensions, while also doubling down on efforts to improve workforce skills, boost investment, and support innovation.

As always, economic forecasts are just that – forecasts. They can change with global events, political shifts, or sudden market surprises. But for now, the message is clear: cautious optimism is on the rise, but we’re not out of the woods just yet.

This article is for informational purposes only and reflects the situation at the time of writing. It does not constitute financial advice. Readers should seek professional guidance before making financial decisions.