The International Monetary Fund (IMF) has released a much-anticipated assessment of the UK economy for 2025, and the headlines are encouraging: recovery is underway, though some roadblocks may remain. 

Here’s what small business owners need to know – and how these developments could affect your planning in the months ahead.

Economic Growth: Cautious Optimism for 2025 and Beyond

According to the latest IMF Article IV Consultation, the UK economy is gradually regaining its footing following the turbulence of recent years. 

Modest growth of 1.2% is expected for 2025, picking up to 1.4% in 2026. This improvement is being driven by a mix of increased business investment, consumer spending, and supportive public policies announced in recent government budgets.

For business owners: This shifts the landscape towards more stability. Increased economic activity can gradually boost demand for goods and services, potentially bringing new opportunities for growth.

Inflation: Still Above Target, But Set to Ease

Rising prices have been a particular worry for small business owners, impacting everything from supply costs to customer spending power. The IMF forecasts inflation to average 3.2% in 2025, higher than the Bank of England’s 2% target, before easing to around 2.3% in 2026. 

Price growth should become less of a challenge as supply and demand rebalance, although caution is still advised for cost management and pricing strategies in the near term.

For business owners: 

• Continue to monitor supplier contracts and review pricing regularly.
• Consider hedging options for key inputs or locking in prices where possible.

Government Spending and Fiscal Policy: A Steady Course

The IMF noted that the government’s current blend of spending and careful borrowing is helping support recovery, without letting national debt spiral out of control. The Fund stressed, however, that sticking to planned deficit reduction over the next five years will be important to sustain confidence and long-term growth.

For business owners: Changes or U-turns on fiscal plans could create uncertainty. It’s wise to keep an eye on government announcements, especially those affecting taxes, business rates, and potential new support programmes.

Interest Rates: Lowering, But Slowly

With inflation not fully tamed, the IMF threw its support behind the Bank of England’s cautious approach to cutting interest rates. Gradual reductions are likely, helping lighten the cost of borrowing for businesses and households – but don’t expect sharp falls in the immediate future.

For business owners:

• Review your financing arrangements: speak to your bank or adviser about refinancing opportunities as rates start to come down.
• Consider whether now is a good time to invest in growth but be aware of continued caution in lending markets.

The Importance of Long-Term Reform

While the short-term outlook is improving, the IMF highlighted key areas for reform to keep the recovery going. Particular focus was placed on:

• Improving workforce skills and training: Addressing skill shortages will help businesses expand and adapt.
• Simplifying planning regulations: Making it easier to expand premises or launch new locations.
• Stability in economic policy: Frequent changes are disruptive; a steady hand will enable business planning and investment.

Extra insights for your business:

• The IMF noted that UK productivity growth remains sluggish compared to some international peers. Adopting technology, investing in staff training, and adjusting to flexible working practices could offer competitive advantages.
• Global economic uncertainty remains a risk – it’s sensible to maintain healthy cash reserves and diversify customer bases where possible.

Next Steps…

1. Stay informed: Economic conditions are improving, but developments remain fluid. Keep an eye on business updates from trusted sources to stay ahead.
2. Plan for modest growth: While strong expansion may not happen overnight, the improving outlook suggests it may be time to review hiring plans, investment, and growth opportunities. You may not want to go ahead just yet, but have updated plans in mind.
3. Monitor your costs: Keep a close watch on energy, rent, and suppliers, and pass increases on to customers only when necessary.
4. Embrace upskilling: Take advantage of government or industry training initiatives to improve workforce skills.

Final Thoughts

The IMF’s cautiously upbeat outlook is welcome news for UK small businesses after a tough period. You can read more from the IMF report here.

Improved economic stability, easing inflation, and gradual interest rate cuts signal a more positive climate for growth in the months ahead. As always, staying informed and agile will be key to making the most of new opportunities, while staying prepared for any bumps we may incur along the way. 

As ever, if you have any concerns or questions, please get in touch! In the meantime, we’ll keep you up to date with news and developments, whether positive or otherwise.