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 would experience the most significant growth decline among major economies due to the Iran conflict. This comes after the IMF revised its UK growth forecast to 0.8% for this year, down from the 1.3% projection made in January prior to the conflict.

The Fund attributed the downgrade to several factors, including the ongoing war, reduced interest rate cuts, and the expectation that higher energy prices would persist into the next year. Additionally, the IMF cautioned that a prolonged conflict could lead to a global economic downturn, potentially resulting in a recession.

The UK’s downgrade of half a percentage point is the largest among advanced economies, with the nation now expected to have middling growth this year compared to its peers. The revision mirrors the OECD’s recent projection, which also identified the UK as the G20 economy most affected by the war. The IMF highlighted the UK’s sensitivity to energy price spikes, noting its status as a net importer of energy.

Inflation is projected to rise to 3.2% this year, making it the joint highest in the G7 alongside the US in 2026 and Italy in 2027. The Fund said UK inflation would temporarily surge to 4% before settling back to the target rate by late 2027 as energy costs ease and wage growth slows. The government has set a target to become the fastest-growing G7 economy by the end of this parliament.

Before the conflict, the IMF had anticipated improved economic prospects due to lower US trade tariffs and increased trade among China, Europe, and Canada. However, the ongoing war has now placed the global economy at risk of being “thrown off course,” with many Gulf nations like Iran, Iraq, Qatar, and Bahrain expected to contract this year. In severe scenarios, with oil prices averaging $110 a barrel this year and $125 next year, a global recession could become a “close call.”

“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 said.