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

UK Faces Largest Growth Impact from Iran Conflict Among Major Economies, IMF Warns

The International Monetary Fund (IMF) has warned that the UK will endure the most significant decline in economic growth among major economies due to the Iran war. In its latest World Economic Outlook, the Fund revised its growth projection for the UK this year to 0.8%, down from the 1.3% forecast made earlier this year before hostilities escalated. The downward adjustment is attributed to the ongoing conflict, reduced interest rate cuts, and the prolonged effects of elevated energy prices.

Central banks are advised to temper their rate-hiking strategies as the IMF highlights the risk of a global recession if the war continues. The UK’s growth contraction of half a percentage point is the most pronounced within the group of advanced economies, positioning it as a slower-growing nation compared to its counterparts. This revision aligns with the OECD’s recent assessment, which also identified the UK as the G20 economy most vulnerable to the war’s economic fallout.

The IMF emphasized that the UK’s status as a net importer of energy makes it particularly sensitive to sharp price surges. However, the Fund anticipates a recovery, projecting the UK to regain its position as the fastest-growing European economy in the G7 by 2026, albeit at a reduced pace of 1.3% growth. The government aims to achieve this status by the end of this parliamentary term.

Meanwhile, the UK is forecast to experience the joint highest inflation rate in the G7 this year, at 3.2%, matching the U.S. in 2026 and Italy in 2027. The IMF noted that inflation is expected to temporarily rise to 4% this year before easing to the target rate by 2027. This projection follows a 3% annual inflation rate in February, surpassing the Bank of England’s 2% goal.

“Reacting strongly to flexible commodity prices, when supply constraints are present only in the related sectors, brings down inflation fast but risks a recession later,” the IMF stated.

The Fund’s cautious outlook stems from uncertainty surrounding the Gulf conflict’s resolution, which it assumes will occur by mid-year. Previously, it anticipated improved economic prospects due to lower U.S. trade tariffs and increased trade among China, Europe, and Canada. Now, the IMF warns that the war threatens to disrupt global economic momentum, potentially leading to a recession if oil prices remain above $110 per barrel and energy costs keep climbing.

Many Gulf nations, including Iran, Iraq, Qatar, and Bahrain, are expected to see economic contractions this year. In the worst-case scenario, sustained high oil prices and rising interest rates could push the world into a “close call” recession.