The International Monetary Fund (IMF) has projected that the energy shock stemming from the Iran war will impact the United Kingdom more severely than any other advanced economy globally.
In its latest World Economic Outlook, the IMF revised down its growth forecast for the UK this year to 0.8%, a significant drop from the 1.3% prediction made in January before the conflict escalated. The Fund attributed this downgrade to the ongoing war, fewer anticipated interest rate cuts, and the expectation that elevated energy prices would continue to exert pressure into the following year. This half-percentage-point revision represents the largest downgrade among the world’s advanced economies, positioning the UK for only moderate growth compared to its peers this year. The Organisation for Economic Co-operation and Development (OECD) echoed this sentiment last month, also forecasting the UK would suffer the most significant economic growth hit among G20 major economies due to the Iran war.
As a net energy importer, the IMF highlighted the UK’s particular vulnerability to rapid increases in energy prices. However, the Fund anticipates a recovery, with the UK projected to become the fastest-growing European economy within the G7 group next year, albeit at a slightly slower rate of 1.3%. The government has set a key objective to achieve the fastest growth among G7 economies by the end of the current parliamentary term.
Regarding inflation, the UK is expected to experience the joint-highest rates within the G7, forecast at 3.2% this year and 2.4% next year (alongside the US in 2026 and Italy in 2027). The IMF predicts a temporary rise in UK inflation towards 4% this year before returning to the Bank of England’s 2% target by the end of 2027, as energy price impacts subside and a weakening job market moderates wage growth.
Responding to the IMF’s assessment, Chancellor Rachel Reeves acknowledged the costs of the Iran war, 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.” She added that the government’s efforts to build economic stability had placed the UK in a stronger position, but “there is more to do.”
In contrast, US Treasury Secretary Scott Bessent told the BBC that a “small bit of economic pain for weeks” was a worthwhile trade-off for the security gained by eliminating the risk of Iran deploying nuclear weapons. He emphasized long-term security over short-term forecasts, arguing the war had removed the “tail risk” of such a weapon being used. However, the BBC has previously reported that the threat of Iranian ballistic missiles to London is remote, a sentiment echoed by a UK government spokesperson who stated there was “no assessment” of Iran targeting Europe with missiles, affirming Britain’s military capability to defend against any attacks.
Domestically, Shadow Chancellor Sir Mel Stride criticized Reeves, asserting she had “no one to blame but herself” for the extent of the IMF’s downgrade, citing increases to employers’ National Insurance and business rates. He claimed her “plan” had resulted in the highest G7 inflation, business closures, and a soaring cost of living. Liberal Democrat Treasury spokesperson Daisy Cooper condemned the downgrade as an “indictment of Trump’s idiotic war,” while SNP Westminster leader Stephen Flynn blamed “Labour Party failure” for the economic impact on Scottish families. A Plaid Cymru spokesperson highlighted the need for greater investment in renewables, attributing the downgrade to successive governments’ failure to diversify the energy mix.
IMF chief economist Pierre-Olivier Gourinchas urged countries, including the UK, to exercise “great caution” when considering new assistance programmes. He noted that despite efforts to rebuild financial buffers, the UK now has limited fiscal capacity due to the war, advising that any support measures should “stay within the envelope” of existing government spending.
The IMF also cautioned central banks against premature interest rate hikes, warning that aggressively reacting to volatile commodity prices, when supply constraints are localized, could bring down inflation quickly but risk a later recession.
The Fund’s forecast carries a significant degree of caution, given the inherent uncertainties in the Gulf region, and relies on a relatively swift resolution to the conflict by the second half of the year. The IMF noted that prior to the war, it had anticipated an upgrade to global economic prospects due to reduced US trade tariffs and increased trade among China, Europe, and Canada. However, it now warns that the global economy faces the threat of being “thrown off course.” Economies in several Gulf nations, including Iran, Iraq, Qatar, and Bahrain, are expected to contract this year. In more severe scenarios, with oil prices averaging $110 a barrel this year and $125 next, coupled with continued rises in energy prices and interest rates, a global recession would become a distinct possibility.
#IranWar #UKEconomy #IMFForecast #GlobalEconomy #Inflation #GDPGrowth #EnergyPrices #G7Economies #EconomicOutlook #Geopolitics
Leave a Reply