UK Economic Impact of Iran War Predicted by IMF
The International Monetary Fund (IMF) has warned that the UK will experience the most significant economic setback among advanced economies due to the ongoing Iran conflict. This marks the first time the Fund has revised its growth forecast for the UK since the hostilities began, lowering the projected annual increase to 0.8% from the earlier 1.3% estimate made in January. The downgrade is attributed to the war, limited interest rate reductions, and the expectation that energy price hikes will persist into the next year.
Global Economy at Risk
The IMF cautioned that the conflict could disrupt the global economy, potentially pushing it off track. A drawn-out war might even trigger a worldwide recession. The Fund advised central banks to tread carefully when raising rates to combat inflation, emphasizing that rapid rate increases might curb inflation quickly but could lead to a later economic downturn.
“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.”
UK inflation is forecast to reach 3.2% this year, alongside the US in 2026 and Italy in 2027, making it the joint highest among G7 nations. The IMF noted that inflation is expected to temporarily rise this year, peaking at 4%, before falling back to the Bank of England’s 2% target by the end of 2027 as energy costs stabilize and wage growth slows. Meanwhile, the government aims to be the fastest-growing G7 economy by the end of this parliament.
Political Reactions and Uncertainty
Shadow chancellor Sir Mel Stride criticized the downgrade, attributing it to the government’s policies, including increased 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 argued.
The IMF’s outlook hinges on a swift resolution to the Gulf conflict, as its projections depend on a rapid easing of tensions. Before the war, the Fund had anticipated improved economic prospects due to lower US trade tariffs and increased trade among China, Europe, and Canada. However, the current situation has shifted, with the global economy now facing a “close call” for recession under severe oil price scenarios exceeding $110 per barrel and rising further in 2027.
Gulf nations like Iran, Iraq, Qatar, and Bahrain are also expected to contract this year. The IMF highlighted that the prolonged conflict could amplify economic risks, particularly if energy prices and interest rates continue to climb. This underscores the need for careful fiscal and monetary strategies to mitigate the fallout across major economies.
