The Office for Budget Responsibility is expected to upgrade growth forecasts for the current year when it publishes alongside the Budget on Wednesday, but the fiscal watchdog is likely to signal that growth could slow in 2027 compared with previous expectations. The International Monetary Fund raised its forecast for UK growth this year to 1.3 per cent, up from a 1% prediction, but cut its 2027 projection to 1.2 per cent from 1.3 per cent. The IMF indicated that spending on artificial intelligence and other technology has helped support growth despite the ongoing Middle East conflict, which has driven up inflation through higher oil prices.
Recent economic data has painted a mixed picture. The Office for National Statistics showed that UK gross domestic product rose by 0.1 per cent in August after increases of 0.4 per cent in the two previous months, suggesting activity is slowing. However, flash purchasing managers' index data published on Friday pointed to the strongest business activity since February in October, boosted by artificial intelligence. Consumer prices inflation reached 3.5 per cent in September, an 11-month high, driven largely by a 30 per cent jump in motor fuel prices. The Bank of England forecasts inflation will peak at slightly above 4 per cent at the start of next year, with household energy costs due to surge by around 16 per cent from January.
The Chancellor faces mounting pressure on public finances. Government borrowing rose to £24.5 billion in September, above forecasts, as central government debt interest costs hit £10.9 billion, up £1.6 billion year-on-year and marking the largest September figure on record. Yields on long-term government bonds hit record levels last month and have remained elevated. Economists at EY have predicted the Government's fiscal headroom has roughly halved to £11 billion, meaning spending plans will need to be offset by either tax rises or further borrowing.
The labour market has shown strength, with unemployment falling to 4.7 per cent in the three months to August, the lowest level in more than a year, and the IMF upgraded its unemployment projection for this year to 5.3 per cent from 5.6 per cent. However, job vacancies have seen their biggest decline since the start of the year. An estimated 981,000 people aged 16 to 24 were classified as not in employment, education or training in the quarter to June, prompting the Government to stress getting young people into work as a priority.
Consumer confidence has weakened significantly. A survey from S&P Global showed UK consumer sentiment this month dropped to the lowest level since July 2023 amid concerns over rising inflation, while retail sales volumes fell by 0.4 per cent in September as warmer weather reduced demand for seasonal clothing. Some analysts suggest shoppers are being cautious ahead of the Budget announcement.