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

UK Growth Outlook Deteriorates Amid Iran Conflict, IMF Warns

The International Monetary Fund (IMF) has warned that the UK faces the most severe economic slowdown among major advanced economies as a result of the ongoing Iran war. Its latest World Economic Outlook revised the nation’s growth forecast for this year to 0.8%, down from the earlier 1.3% projection made in January before hostilities escalated. This adjustment, according to the Fund, stems from the war’s disruption, reduced scope for interest rate cuts, and the anticipation that elevated energy costs will persist into the following year.

Alongside the UK, other economies in the G7 are expected to see slower growth, but the nation’s contraction is the most pronounced. The IMF cautioned that the conflict could destabilize global economic trends, with prolonged hostilities risking a worldwide recession. It advised central banks to exercise restraint in increasing interest rates to address inflationary pressures, emphasizing that aggressive rate hikes might accelerate the downturn.

Global Economic Uncertainty

The IMF highlighted the uncertainty in the Gulf region as a key factor in its cautious forecast. The agency’s projections depend on a rapid resolution of the conflict by the second half of the year. Prior to the war, the Fund had anticipated improved economic prospects, driven by reduced U.S. trade tariffs and increased trade among China, Europe, and Canada. However, the current outlook now signals a potential global economic disruption.

Many Gulf countries, including Iran, Iraq, Qatar, and Bahrain, are forecast to experience contraction this year. In severe scenarios, where oil prices average $110 per barrel this year and $125 next year, combined with sustained increases in energy costs and interest rates, the risk of a global recession becomes more tangible.

UK Inflation and Future Prospects

UK inflation is projected to rise to 3.2% this year, making it the joint highest among G7 nations, alongside the U.S. in 2026 and Italy in 2027. The IMF noted that inflation in the UK reached 3% in the year to February, surpassing the Bank of England’s target of 2%. Despite this, the Fund expects energy price impacts to wane by the end of 2027, allowing inflation to stabilize at 2.4%.

“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 UK government aims to position itself as the fastest-growing G7 economy by the end of this parliament. While the current growth projection is 0.8%, the IMF anticipates a rebound next year, with the UK expected to reclaim its position as the leading European growth performer among smaller advanced economies. However, this recovery is projected to occur at a slightly slower pace of 1.3%.