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

The energy shock stemming from the Iran war will strike the UK harder than any other advanced economy, the International Monetary Fund (IMF) has warned, slashing its growth forecast for the country by half a percentage point and cautioning that a prolonged conflict could trigger a global recession. In its latest World Economic Outlook, the IMF cut its estimate for UK growth this year to 0.8%, down significantly from the 1.3% prediction made in January before hostilities began. This downgrade is the largest among the world's advanced economies, driven by the conflict, a reduction in anticipated interest rate cuts, and the expectation that higher energy prices will linger into next year. As a net importer of energy, the UK remains particularly vulnerable to rapid price surges. The IMF now projects the UK will have the joint highest inflation in the G7 this year at 3.2%, and again next year at 2.4%. However, the Fund expects the UK to rebound in 2026, once again becoming the fastest-growing European economy in the G7 at a slightly slower rate of 1.3%, aligning with the government's key parliamentary target. Responding to the grim forecast, Chancellor Rachel Reeves acknowledged the inevitable economic toll. "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." She added: "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." Conversely, US Treasury Secretary Scott Bessent framed the economic disruption as a necessary trade-off for global security. "I wonder what the hit to global GDP would be if a nuclear weapon hit London…I am saying that I am less concerned about short term forecasts, for long term security," he told the BBC. Despite calls for the government to intervene with measures like cutting fuel duty, IMF chief economist Pierre-Olivier Gourinchas warned that the UK has limited fiscal maneuverability due to the war. "There isn't really a lot of room to go and spend in order to support households and businesses," he said, advising that any assistance must stay within the envelope of current government spending. With UK inflation currently at 3%—above the Bank of England's 2% target—some analysts expect interest rate hikes later this year. However, the IMF issued a stark warning against premature monetary tightening: "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," it said. The IMF's downgrade ignited a fierce political backlash. Shadow chancellor Sir Mel Stride blamed the government's domestic policies, stating: "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," Liberal Democrat Treasury spokesperson Daisy Cooper said the UK economic growth downgrade was an "indictment of Trump's idiotic war and all those who cheered it on - including Reform and the Conservatives". She added: "[Prime Minister Sir Keir] Starmer's latest flurry of stern words directed at the US President are worthless if there is no plan to protect people from Trump's economic vandalism," SNP Westminster leader Stephen Flynn said: "Yet again, Scottish families are paying the price for Labour Party failure on the economy as the cost of living soars and the UK faces the biggest hit to growth of any major economy." Meanwhile, a Plaid Cymru spokesperson pointed to broader energy policy failures: "The downgrade in the UK's economic growth comes as little surprise, unfortunately, given the failure of successive governments to move towards a much more diverse energy mix," they said. The IMF's baseline projections rely on a relatively swift resolution to the Gulf conflict by the second half of the year. Before the war, the Fund had expected to upgrade global prospects, but now warns the global economy is threatened with being thrown off course. In more severe scenarios where oil prices average $110 a barrel this year and $125 next, the Fund warned that a global recession would be a "close call".