UK faces biggest hit to growth from Iran war of major economies, IMF says
UK Growth Set to Suffer Largest Decline Amid Iran Conflict, IMF Warns
The International Monetary Fund (IMF) has projected that the UK will face the most significant economic setback among developed nations due to the ongoing Iran war. Its latest World Economic Outlook report revised the country’s annual growth forecast for this year to 0.8%, down from the earlier 1.3% estimate made in January before hostilities began.
The Fund attributed the downward adjustment to several factors, including the war’s energy price surge, limited interest rate cuts, and the anticipation that higher energy costs will persist into 2025. It also highlighted that the conflict poses a risk to global economic stability, with prolonged tensions potentially triggering a worldwide recession.
“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.
The organisation cautioned central banks against premature rate hikes, urging a balanced approach to combat inflation without jeopardizing growth.
The UK’s revised growth rate represents the sharpest decline among major economies, positioning it as a laggard compared to other advanced nations. This forecast mirrors the OECD’s recent analysis, which also identified the UK as the G20 economy most vulnerable to the Iran conflict’s fallout.
The IMF noted that the UK, being a net energy importer, remains particularly susceptible to volatile oil prices. However, it expects a rebound next year, with the UK once again becoming the fastest-growing European economy in the G7 group, though at a slower pace of 1.3% growth.
The UK is also anticipated to face joint-highest inflation in the G7 this year, projected at 3.2%, followed by 2.4% in 2026. Alongside the US and Italy, it will see inflation rates rise to 3.2% in 2026 and 2.4% in 2027, respectively. The Fund warned that inflation in the UK is expected to temporarily spike to 4% this year before returning to its target by 2027.
Currently, UK inflation stood at 3% for the year to February, surpassing the Bank of England’s 2% goal. Some experts suggest the central bank may increase rates later this year. The IMF’s analysis hinges on a swift resolution to the Gulf conflict by mid-2025, which would mitigate further economic disruptions.
Before the war, the IMF had anticipated improved economic outlooks, citing reduced US trade tariffs and increased trade between China, Europe, and Canada. Now, with the conflict escalating, the organisation has warned that the global economy could veer off track, threatening to destabilize growth prospects.
Meanwhile, Gulf economies such as Iran, Iraq, Qatar, and Bahrain are forecast to contract this year. In severe scenarios, with oil prices averaging $110 per barrel this year and $125 next year, a global recession could emerge as a near-certainty if energy and interest rates continue their upward trajectory.