UK faces biggest hit to growth from Iran war of major economies, IMF says

UK Faces Largest Growth Setback Amid Iran Conflict, IMF Warns

The International Monetary Fund (IMF) has highlighted that the UK will endure the most severe economic consequences among major advanced economies due to the ongoing Iran war. This assessment comes as the Fund revised its growth projection for the UK this year to 0.8%, down from the earlier 1.3% forecast made in January prior to the outbreak of hostilities. The downgrade is attributed to the war’s impact, reduced interest rate cuts, and the anticipation that elevated energy prices will persist into 2025.

The IMF also cautioned that the conflict could destabilize the global economy, with prolonged fighting potentially leading to a recession. Central banks are urged to proceed cautiously with raising interest rates to counter inflation, as the Fund warned against overreacting to volatile commodity prices. The UK’s growth adjustment is the most pronounced among G7 nations, positioning it as a middle performer compared to its counterparts this year.

Similar to the OECD, the IMF noted that the UK is likely to suffer the greatest decline in economic growth among G20 countries from the Iran conflict. As a net energy importer, the UK remains particularly vulnerable to sharp increases in energy costs. However, the Fund anticipates a recovery, projecting the UK to regain its status as the fastest-growing European economy in 2026 with a growth rate of 1.3%.

Chancellor Rachel Reeves responded to the forecast, stating:

“The war in Iran is not our war, but it will come at a cost to the UK. These are not costs I wanted, but they are costs we will have to respond to.” We entered this conflict from a stronger economic position due to the government’s efforts to build stability, but there is more work to be done.

In contrast, Sir Mel Stride, the shadow chancellor, criticized the downgrade, attributing it to Reeves’ policies, including increased employers’ National Insurance and business rates. He claimed her strategy to curb costs has resulted in the UK having the highest inflation in the G7, with businesses shutting down and living costs soaring.

The UK’s inflation rate was recorded at 3% for the year ending February, surpassing the Bank of England’s target. Analysts speculate that the central bank may raise interest rates later this year. Yet, the IMF advises against hasty rate hikes, emphasizing that rapid responses to fluctuating energy prices could risk a recession if inflation is only temporary.

The Fund’s forecast incorporates significant uncertainty due to developments in the Gulf region. Its projections depend on a swift resolution to the conflict by mid-year. Initially, the IMF had anticipated improved economic prospects, driven by reduced US trade tariffs and increased trade among China, Europe, and Canada. However, the current situation threatens to derail global economic progress, with Gulf nations like Iran, Iraq, Qatar, and Bahrain expected to contract this year.

In the worst-case scenario, with oil prices averaging $110 per barrel this year and rising to $125 in 2026, the IMF warns of a potential global recession. The combination of persistently high energy costs and climbing interest rates could create a precarious economic environment, according to the report.