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

UK Growth Forecast Slashed by IMF Amid Iran Conflict

The International Monetary Fund (IMF) has warned that the UK will face the most severe economic repercussions among major advanced economies as a result of the ongoing Iran war. Its latest World Economic Outlook report reduces the nation’s growth projection for this year to 0.8%, down from the 1.3% forecast made in January prior to the outbreak of hostilities.

The Fund cites the war, reduced interest rate cuts, and the expectation that energy price surges will persist into 2025 as the primary factors behind the downward revision. It further cautioned that prolonged conflict could destabilize the global economy, potentially leading to a recession. The IMF urged central banks to temper their rate-hiking measures to avoid exacerbating economic downturns.

“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,” stated Chancellor Rachel Reeves.

Reeves emphasized that the UK entered the conflict in a stronger economic position due to government actions aimed at fostering stability, though more work remains. Meanwhile, shadow chancellor Sir Mel Stride criticized the policy, asserting that Reeves’ “plan” to control costs had resulted in the UK having the highest inflation in the G7, with businesses closing and living expenses surging.

The UK’s growth decline of half a percentage point is the most substantial among advanced economies, positioning it with moderate expansion this year relative to its peers. The OECD, in a separate analysis, also identified the UK as the G20 economy most impacted by the conflict, aligning with the IMF’s assessment.

The IMF highlighted the UK’s vulnerability to energy price fluctuations, as the nation relies heavily on imports. While it anticipates a recovery, with the UK expected to lead European growth within the G7 in 2025 at 1.3%, the recovery will be gradual. The government has set a goal to achieve this status by the end of its current parliamentary term.

Inflation in the UK is projected to reach 3.2% this year, alongside the US and Italy in subsequent years. The Fund predicts a temporary spike to 4% this year, followed by a decline to the Bank of England’s target of 2% by late 2027. This projection hinges on energy prices stabilizing and wage growth slowing amid a tightening labor market.

The IMF’s outlook is shaped by the uncertainty surrounding Gulf region events. Its forecasts depend on a swift conflict resolution by mid-2024. Before the war, the Fund had anticipated improved prospects due to reduced US tariffs and increased trade among China, Europe, and Canada. Now, however, it warns that the global economy faces a “close call” for recession under current conditions.

Gulf nations including Iran, Iraq, Qatar, and Bahrain are forecast to contract economically this year. In the most extreme scenarios, with oil prices averaging $110 per barrel this year and $125 next year, alongside rising energy and interest rates, the IMF suggests a global recession could materialize.