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

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

The International Monetary Fund (IMF) has warned that the UK will experience the most significant economic slowdown among major economies due to the Iran conflict. In its latest World Economic Outlook, the Fund revised its growth forecast for the UK this year to 0.8%, down from the 1.3% projection made in January before hostilities began. This adjustment stems from the war, limited interest rate cuts, and the expectation that elevated energy prices will persist into the following year.

The IMF highlighted that the ongoing conflict poses a risk to the global economy, potentially derailing growth trajectories. A drawn-out war could trigger a worldwide recession, prompting the Fund to advise central banks to temper their rate hikes in response to inflation. The UK’s growth revision of half a percentage point is the most substantial among advanced economies, positioning it as a moderate-growth nation this year relative to its peers.

Global Economic Uncertainty

The IMF emphasized its cautious approach to the forecast, citing uncertainty in the Gulf region. Its projections hinge on a swift resolution to the conflict by mid-year. Before the war, the Fund had anticipated improved economic prospects, driven by reduced U.S. trade tariffs and increased trade among China, Europe, and Canada. Now, however, it warns that the global economy faces disruption, with Gulf nations like Iran, Iraq, Qatar, and Bahrain expected to contract this year.

Analysts suggest the UK may see inflation reach 3.2% this year, alongside the U.S. and Italy in subsequent years. The IMF notes that inflation will rise temporarily this year, possibly to 4%, but anticipate a return to the Bank of England’s target of 2% by the end of 2027 as energy price effects wane and wage growth slows. Despite this, the Fund cautions against rapid rate increases, warning of potential recession risks if inflation is addressed too aggressively.

“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,” said Chancellor Rachel Reeves.

Reeves added that the UK entered the conflict in a stronger position due to economic stability measures implemented by the government, though more action is needed. Sir Mel Stride, the shadow chancellor, criticized the policy, stating, “Her ‘plan’ to keep costs down has left us with the highest inflation in the G7, with businesses closing and the cost of living skyrocketing.”

Current UK inflation stands at 3%, surpassing the Bank of England’s target. Some experts believe the central bank may raise rates later this year, but the IMF urges caution, arguing that premature hikes could exacerbate economic challenges. With oil prices projected to average $110 a barrel this year and $125 next, the Fund warns that sustained energy costs and rising rates could make a global recession a “close call.”