UK faces biggest hit to growth from Iran war of major economies, IMF says
UK Growth Under Threat as Iran War Escalates, IMF Warns
Global Economic Impact of the Conflict
The International Monetary Fund (IMF) has warned that the Iran war will have the most severe effect on economic growth among major advanced economies, with the UK facing the sharpest decline. In its latest World Economic Outlook, the Fund revised its projection for UK growth this year to 0.8%, down from the 1.3% forecast issued in January before hostilities began. This adjustment stems from the war’s influence, restrained interest rate cuts, and the anticipation that elevated energy costs will persist into 2025.
The IMF cautioned that the ongoing conflict could disrupt global economic momentum, potentially leading to a recession if it lasts beyond the current period. It urged central banks to proceed cautiously with raising interest rates, as aggressive measures might accelerate inflation but also increase the risk of a downturn. The UK’s growth reduction of half a percentage point is the most significant among its advanced economy counterparts, positioning it as a moderate performer relative to peers.
Inflation and Recovery Outlook
The Fund highlighted the UK’s vulnerability as a net energy importer, noting its sensitivity to surging oil prices. However, it anticipated a rebound, projecting the UK to regain its status as the fastest-growing European economy in the G7 group by 2026, albeit at a slightly slower pace of 1.3%. The government aims to achieve this status by the end of its parliamentary term, a goal it claims is supported by prior economic stability measures.
Inflation is expected to rise to 3.2% this year, surpassing the Bank of England’s target, and then moderate to 2.4% in 2027 as energy price impacts wane and wage growth slows. The IMF emphasized that this inflationary surge is temporary, with rates projected to return to the 2% benchmark by year-end. Analysts, though, suggest the Bank of England may still raise interest rates later in 2025.
Political Reactions and Economic Uncertainty
“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.
Shadow chancellor Sir Mel Stride criticized the government, attributing the IMF’s downgrade to poor policy choices, particularly the rise in employers’ National Insurance and business rates. He argued that the “plan” to reduce costs had resulted in the UK experiencing the highest inflation in the G7, with businesses closing and living expenses soaring.
The IMF’s forecast, which accounts for uncertainty in the Gulf region, hinges on a swift resolution to the conflict by mid-2025. Previously, it had anticipated improved economic prospects due to reduced US trade tariffs and increased trade among China, Europe, and Canada. Now, however, it warns that the global economy risks being derailed, with Gulf nations like Iran, Iraq, Qatar, and Bahrain projected to contract this year.
In extreme scenarios, where oil prices average $110 per barrel this year and $125 in 2026, combined with persistent energy and interest rate increases, a global recession could become a “close call.” The Fund’s caution reflects the volatility of current geopolitical tensions and their potential to reshape economic trajectories worldwide.
