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

UK Growth Slowed Most by Iran Conflict, IMF Warns

The International Monetary Fund (IMF) has warned that the UK will suffer the largest economic setback among major advanced economies due to the ongoing Iran conflict. Its latest World Economic Outlook revised the nation’s growth forecast for this year to 0.8%, a drop from the earlier 1.3% projection made in January before hostilities began. The downgrade is attributed to the war, limited interest rate cuts, and the prolonged effect of elevated energy prices into next year.

Global Economy at Risk

The IMF highlighted that the war could destabilize the global economy, with a prolonged conflict posing a threat of recession. It urged central banks to temper their rate-hiking strategies to combat inflation, arguing that aggressive measures might exacerbate economic downturns later. The UK’s growth contraction is the most significant among advanced economies, placing it in the middle of its peers for this year.

Recovery Outlook

Despite the current challenges, the IMF anticipates a recovery for the UK, projecting it to once again lead European growth within the G7 group next year at a slightly slower pace of 1.3%. The government has set a goal to become the fastest-growing G7 economy by the end of this parliamentary term. Meanwhile, the UK is forecast to have the joint highest inflation in the G7 this year, reaching 3.2%, with rates expected to ease to 2.4% by the end of 2027.

“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 criticized the downgrade, blaming it on the government’s policies, including increases to employers’ National Insurance and business rates. “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 stated.

Uncertainty in the Gulf

The IMF emphasized caution in its forecasts, citing uncertainty in the Gulf region as a key factor. Its projections depend on a swift resolution to the conflict by the second half of the year. Before the war, the Fund expected to revise economic outlooks upward due to reduced US trade tariffs and increased trade among China, Europe, and Canada. However, the conflict now threatens to derail these optimistic trends.

Gulf nations like Iran, Iraq, Qatar, and Bahrain are expected to contract this year. In severe scenarios, with oil prices averaging $110 per barrel this year and rising to $125 in 2026, combined with persistent inflation and higher interest rates, a global recession could become a “close call.” The IMF noted that inflation in the UK will temporarily spike to 4% this year but should return to the Bank of England’s 2% target by the end of 2027 as energy price pressures ease and wage growth slows.