Iran War to Deliver Biggest Economic Blow to UK Among Major Economies, IMF Warns

The International Monetary Fund (IMF) has projected that the United Kingdom is set to endure the most substantial economic impact among advanced economies as a result of the war in Iran. In its latest World Economic Outlook, the IMF has reduced its forecast for UK growth in 2025 to 0.8%, a notable decrease from the 1.3% prediction made in January, prior to the outbreak of hostilities.

This revised outlook for the UK reflects the significant influence of the conflict, fewer expected interest rate reductions, and the lingering effects of elevated energy prices well into next year. The IMF also issued a stark warning that the war threatens to derail the global economy, with a prolonged conflict potentially leading to a worldwide recession. Central banks were urged to exercise caution regarding interest rate increases to manage inflation.

The half-percentage-point downgrade for the UK represents the largest such revision among advanced economies, positioning the UK for only moderate growth compared to its counterparts. This assessment aligns with earlier predictions from the Organisation for Economic Co-operation and Development (OECD), which similarly anticipated the UK would face the most severe hit to economic growth among the G20 major economies due to the Iran war. As a net importer of energy, the UK remains particularly susceptible to rapid fluctuations in energy prices.

Despite the immediate challenges, the IMF anticipates a recovery for the UK, forecasting it to become the fastest-growing European economy within the G7 group by 2026, albeit at a slightly slower rate of 1.3%. The government maintains a key objective of achieving the fastest growth rate in the G7 by the end of the current parliament.

The UK is also projected to experience the joint highest inflation in the G7 this year, at 3.2%, and next year, at 2.4%. The IMF expects UK inflation to temporarily increase towards 4% this year before returning to the Bank of England's 2% target by the close of 2027, as energy price impacts diminish and a weakening job market moderates wage growth.

Chancellor Rachel Reeves acknowledged the costs of the Iran war, stating, "The war in Iran is not our war, but it will come at a cost to the UK." Conversely, Shadow Chancellor Sir Mel Stride criticised Reeves, attributing the scale of the IMF's downgrade to government policies, arguing that her approach has resulted in the highest inflation in the G7, business closures, and a soaring cost of living.

The IMF's forecast carries a significant degree of caution, given the inherent uncertainties of the situation in the Gulf. Its projections are predicated on a relatively swift resolution to the conflict by the latter half of the year. The Fund also highlighted that prior to the war, an upgrade to economic prospects had been anticipated. However, it now warns that "the global economy is threatened with being thrown off course."