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

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

The International Monetary Fund (IMF) has warned that the UK is experiencing the most significant economic setback among major economies due to the Iran conflict. Its latest World Economic Outlook revised the country’s growth forecast for this year to 0.8%, a drop from the 1.3% projection made in January before hostilities began. The downgrade is attributed to the war, limited interest rate cuts, and the anticipated persistence of elevated energy prices into 2025.

The IMF cautioned that the ongoing conflict could derail global economic progress, with prolonged warfare risking a worldwide recession. It urged central banks to be measured in their response to inflation, emphasizing that aggressive rate hikes might accelerate price declines but leave the economy vulnerable later. The UK’s growth reduction of half a percentage point is the most severe among advanced economies, placing it in the middle of G7 growth rates compared to other major nations.

Similar concerns were echoed by the OECD, which last month also identified the UK as the G20 economy most affected by the war. The Fund pointed out that the UK’s reliance on energy imports makes it particularly susceptible to sharp price increases. However, it expects the UK to rebound in 2025, regaining its status as the fastest-growing European economy in the smaller G7 group, though at a slightly slower pace of 1.3%.

“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. “We entered this conflict in a stronger position because of the choices this government took to build economic stability, but there is more to do.”

Shadow Chancellor Sir Mel Stride contested the IMF’s assessment, blaming Reeves for the downgrade. He argued that her policies had resulted in the UK’s highest inflation in the G7, with businesses closing and living costs soaring. “Her ‘plan’ to keep costs down has left us with the highest inflation in the G7, with businesses closing and the cost of living skyrocketing,” he added.

The IMF’s projections hinge on a swift resolution to the Gulf conflict by mid-year. Before the war, it anticipated improved economic prospects, aided by reduced U.S. trade tariffs and increased trade among China, Europe, and Canada. Now, the Fund claims the global economy is at risk of being “thrown off course,” with Gulf nations such as Iran, Iraq, Qatar, and Bahrain expected to contract this year.

Analysts suggest the Bank of England may raise interest rates later this year to combat inflation. However, the IMF warns that premature rate increases could lead to a recession, even as inflation temporarily rises. The UK’s inflation is forecast to reach 3.2% this year, with the US and Italy following in 2026 and 2027 respectively. The Fund anticipates a return to the 2% target by the end of 2027 as energy price impacts diminish and wage growth slows.