IMF lifts UK forecast, lowers EZ, warns on Trump plans

17th Jan 2025 16:07

(Sharecast News) - Britain's 2025 growth forecast has been ticked up by the International Monetary Fund, while the Washington-based organisation also warned about the impact of incoming US President Donald Trump's plans for tariffs, tax cuts and looser regulation.

In a much-needed boost to embattled Finance Minister Rachel Reeves, the IMF said it expected the UK economy to grow by 1.6% in 2025, up from an earlier forecast of 1.5%, citing the new Labour government's higher investment spending, better household finances and interest rate cuts by the Bank of England.

For the eurozone the IMF revised down its forecasts to 1% from 1.2%, saying growth would now be at a more gradual pace than anticipated in October, with geopolitical tensions continuing to weigh on sentiment.

"Weaker-than-expected momentum at the end of 2024, especially in manufacturing, and heightened political and policy uncertainty explain a downward revision," the IMF said.

The Bank of England was forecast by IMF analysts to cut interest rates four times this year to 3.75% from 4.75%.

Germany, Europe's largest economy, was downgraded to grow by just 0.3% from a previous estimate of 0.8% after two years of contraction. France is predicted to grow by 0.8% from prior forecasts of 1.1%.

The US will still top the G7 table as the fastest growing economy, expanding by 2.7% and 2.1% in 2026, but there was a warning from IMF chief economist, Pierre-Olivier Gourinchas who said Trump's proposed tax cuts could stimulate growth but risked higher interest rates as the US Federal Reserve would be forced to stop inflation.

"Furthermore, higher borrowing to fund looser fiscal policy could increase demand for capital globally, leading to an increase in interest rates and possibly depressing economic activity elsewhere," he said.

"An intensification of protectionist policies, for instance, in the form of a new wave of tariffs, could exacerbate trade tensions, lower investment, reduce market efficiency, distort trade flows and again disrupt supply chains. Growth could suffer in both the near and medium term, but at varying degrees across economies."

"An excessive rollback of regulations designed to put limits on risk-taking and debt accumulation may generate boom-bust dynamics for the US in the longer term, with repercussions for the rest of the world."

The risk of inflation returning - forcing central banks to raise interest rates again - was one of several issues the IMF said could threaten its assessment.

"The risk of renewed inflationary pressures could prompt central banks to raise policy rates and intensify monetary policy divergence. Higher-for-even-longer interest rates could worsen fiscal, financial, and external risks," it said.

Global growth would remain weaker than the pre-pandemic levels, but there was still potential for expansion at 3.3% this year and next.

Reporting by Frank Prenesti for Sharecast.com