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

UK Growth Downgraded as Iran Conflict Intensifies, IMF Warns

The International Monetary Fund (IMF) has predicted that the UK will endure the most significant economic slowdown among major advanced economies due to the ongoing Iran war. The Fund’s latest World Economic Outlook revises the UK’s growth forecast for 2024 to 0.8%, a drop from the earlier 1.3% projection made in January before hostilities escalated.

The downgrade is linked to the war, limited interest rate reductions, and the belief that increased energy costs will persist through 2025. The IMF also warned that the conflict could disrupt global economic stability, with prolonged tensions risking a worldwide recession. It urged central banks to avoid hastening rate hikes to combat inflation, emphasizing the need for prudence.

The UK’s growth contraction of 0.5 percentage points marks the largest adjustment among advanced economies. This aligns with the OECD’s recent forecast, which also identified the UK as the G20 economy most affected by the war. The IMF highlighted the UK’s vulnerability as a net energy importer, noting its sensitivity to sharp price spikes in oil and gas.

Despite the current downturn, the IMF anticipates a recovery, forecasting the UK to become the fastest-growing European economy in the G7 by 2026, albeit at a slower pace of 1.3%. The government aims 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, though it is expected to stabilize by 2027.

The Fund explained that UK inflation will temporarily rise to 4% this year, driven by high energy prices, but will ease as these costs decline and wage growth slows due to a tighter labor market. Inflation stood at 3% in the year to February, exceeding the Bank of England’s target of 2%. Some experts suggest the central bank may increase rates later this year, but the IMF cautioned against overreacting to volatile commodity prices.

“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 IMF’s outlook remains cautious, given the uncertainty in the Gulf region. Its projections depend on a swift resolution to the conflict by the second half of 2024. Previously, the Fund had anticipated improved economic prospects, as US trade tariffs under Trump had been scaled back, and trade between China, Europe, and Canada increased to offset US declines. However, the current scenario now threatens to derail global economic progress.

Many Gulf nations, including Iran, Iraq, Qatar, and Bahrain, are expected to contract this year. In severe scenarios, with oil prices averaging $110 per barrel and climbing to $125 in 2025, combined with rising interest rates, the risk of a global recession becomes a “close call,” according to the Fund.