A new forecast for the UK economy suggests it will grow slightly more than previously expected this year.

The International Monetary Fund (IMF) predicts growth of 1.25% for 2025, rising to 1.4% next year as the economic recovery is “under way”.

While the revision will be welcome news for the Labour government amid poor opinion poll ratings, the IMF has warned that the Chancellor must stick to her rules on tax and spending.

Its forecast comes just over a month after it downgraded its expectations for the UK from 1.6% in 2025 to 1.1%, indicating the volatility caused by geo-political tensions.

Explaining the latest upgrade, Luc Eyraud, the IMF’s UK mission chief, said UK growth had been “very strong” in the first three months of the year.

Government figures revealed the economy was boosted by increases in consumer spending and business investment.

However, they they pre-dated US president Donald Trumps’s tariffs and a series of tax rises that came into effect in April.

That said, the IMF saie a number of government initiatives such as panning reforms and infrastructure investment plans, should increase growth “if properly implemented”.

It insisted that the Chancellor Rachel Reeves needed to balance taxation with spending in the long term and this would mean some “difficult choices”.

The Chancellor said the government’s trade deals were “protecting jobs, boosting investment and cutting prices”.

The Confederation of British Industry reported the steepest decline in UK retail sentiment in five years, with its business sentiment gauge dropping to -29% in May from -19% in February.

It said the year-on-year retail sales balance also weakened significantly, while expectations for June sales deteriorated further.

The British Retail Consortium said shop price deflation held steady at -0.1%, though food inflation rose for the fourth consecutive month, highlighting continued pressure on household budgets.

On London’s equity markets, defence and industrial stocks led gains, buoyed by rising expectations of increased NATO defence spending and positive corporate updates. Melrose Industries climbed 3.7%, BAE Systems added 2.6%, and Rolls-Royce Holdings rose 0.93%.

Premier Inn owner Whitbread gained 1.7% after naming Christine Hodgson as its next chair, succeeding Adam Crozier.

Shares in Aston Martin Lagonda were up 3.9% on optimism over a potential US trade deal and news that CEO Adrian Hallmark had purchased nearly 200,000 shares.

The FTSE 100 index rose 0.69% to close at 8,778.05 points, partly building on gains on Wall Street and in Europe after Donald Trump agreed to delay his 50% tariff threat on the EU.