UK faces biggest hit to growth from Iran war of major economies, IMF says
UK Growth Downgraded by IMF Amid Iran Conflict
The International Monetary Fund (IMF) has warned that the UK will face the most severe economic impact among major advanced economies due to the ongoing Iran war, according to its latest World Economic Outlook. The Fund revised its growth forecast for the UK this year to 0.8%, a drop from the previous 1.3% estimate made in January before hostilities escalated. This adjustment reflects the combined effects of the conflict, reduced interest rate cuts, and the prolonged influence of rising energy prices.
Global Economy at Risk
The IMF cautioned that the war could disrupt the global economy, potentially steering it “off course” and risking a recession if the conflict drags on. It emphasized the need for central banks to temper their approach to raising interest rates, which might quickly curb inflation but leave the economy vulnerable to a downturn. The UK’s growth revision is the largest among advanced economies, positioning it as a moderate performer compared to its peers this year.
“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 stated in its report.
The Organisation for Economic Co-operation and Development (OECD) echoed the IMF’s concerns, projecting that the UK would endure the biggest decline in growth among G20 nations due to the Iran war. The Fund highlighted the UK’s reliance on energy imports, making it especially vulnerable to price surges. However, it anticipates a recovery next year, with the UK regaining its status as the fastest-growing European economy in the G7 group, though at a slightly slower pace of 1.3%.
Inflation Outlook and Regional Impact
The UK is forecast to have the joint highest inflation rate in the G7 this year, at 3.2%, alongside the US in 2026 and Italy in 2027. The IMF expects inflation to temporarily spike this year, reaching 4%, before easing to the target rate by late 2027 as energy price effects wane and wage growth slows. Current inflation stood at 3% for the year to February, exceeding the Bank of England’s 2% goal.
Before the war, the IMF had anticipated improved economic prospects, driven by reduced US trade tariffs and increased trade among China, Europe, and Canada. However, the conflict has upended these plans, casting doubt on global recovery. Many Gulf economies, including Iran, Iraq, Qatar, and Bahrain, are projected to contract this year. In worst-case scenarios, with oil prices averaging $110 per barrel this year and $125 next year, a global recession could become a “close call.”
Analysts suggest the Bank of England may raise interest rates later this year, but the IMF urged caution, stressing that premature hikes could compound the risks of a prolonged economic slowdown. The Fund’s forecasts hinge on a swift resolution of the conflict by the second half of 2024, which would allow energy price pressures to ease and restore growth momentum.
