The UK is forecast to be the second-fastest growing of the world’s most advanced economies this year, according to new projections from the International Monetary Fund (IMF).

The rates of growth remain modest at 1.3% for this year and next, but that outperforms the other G7 economies apart from the US in 2025, in a torrid year of trade and geopolitical tensions.

However, UK inflation is set to rise to the highest in the G7 in 2025 and 2026, the IMF predicts, driven by larger energy and utility bills.

UK inflation is forecast to average 3.4% this year and 2.5% in 2026 but the IMF says this will be “temporary”, and fall to 2% by the end of next year.

The G7 are seven advanced economies – the US, UK, France, Germany, Italy, Canada and Japan – but the group doesn’t include fast-growing economies such as China and India.

The IMF is an international organisation with 190 member countries. They work together to try to stabilise the global economy.

In the IMF’s forecast for economic growth, it predicts the UK will push Canada out of second place, after its trade-war-affected economy was hit by the biggest downgrades for 2025 and 2026. However, Canada is expected to retake second place next year when its economy is forecast to grow at a rate of 1.5%.

Germany, France and Italy are all forecast to grow far more slowly at rates of between 0.2 and 0.9% in 2025 and 2026.

Chancellor Rachel Reeves welcomed the fresh upgrade to the IMF’s outlook for the UK’s economy.

“But know this is just the start. For too many people, our economy feels stuck,” she said.

“Working people feel it every day, experts talk about it, and I am going to deal with it.”

But highlighting the inflation forecasts, shadow chancellor Sir Mel Stride said the IMF assessment on made for “grim reading”.

He said that UK households “were being squeezed from all sides”, adding: “Since taking office, Labour have allowed the cost of living to rise, debt to balloon and business confidence to collapse to record lows.”

The IMF said a slight overall upgrade for the UK in its World Economic Outlook, from its previous outlook in April, was due to “strong activity in the first half of 2025” and an improved trade outlook, partly thanks to the recently announced US-UK trade deal.

The global outlook is dominated by the so far “muted response” of the world economy to the imposition of hefty tariffs on almost all imports into the US, a weakened dollar, questions about the independence of the US Federal Reserve and sky high valuations of US tech companies.

The IMF expect some of this to unwind soon, saying “resilience is giving way to warning signs”. In the US tariff costs which had been absorbed by exporters and retailers, are now feeding into higher goods prices.

So far tariffs have been reflected in higher prices for American shoppers of household appliances, but not for food and clothing.

The IMF cited Brexit as an example of how uncertainty around major changes in trading arrangements can, after a delay, lead to steady falls in investment.

The Fund also pointed to a possible bursting of the US AI tech boom.

“Excessively optimistic growth expectations about AI could be revised in light of incoming data from early adopters and could trigger a market correction,” the IMF said.

Disappointing profit numbers could lead to a “reassessment of the sustainability of AI-driven valuations and a drop in tech stock prices, with systemic implications. A potential bust of the AI boom could rival the dot-com crash of 2000–01 in severity”.

The concentration of the stock market surge on a tiny number of firms and massive funding from less regulated sources outside the banking sector, were particular risks.

Slow growth could hit household wealth, with a lesser ability of major economies to use government borrowing to support their economies, as occurred in recent crises.

Conversely, the IMF also said that “faster AI adoption” could help unleash significant gains in productivity, helping the global economy is handled appropriately.

Elsewhere, the IMF again pointed to the outperformance of the Spanish economy, the fastest-growing large western economy. But the war economy growth seen in Russia last year has now petered out.

There are also concerns about funding for the world’s poorest countries now that aid budgets in many countries, such as the UK and US are being slashed in favour of increased defence spending.

The forecasts were released on the eve of the annual meetings of the IMF and World Bank attended by the world’s finance ministers and central bankers in Washington DC, with considerable attention on a new US bailout for Argentina.

Correction 14 October: An earlier version of this article said the UK would have the second-fastest growing economy of the G7 both this year and next. The UK will have the third fastest growing economy in 2026.