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

The International Monetary Fund (IMF) has forecast that the United Kingdom will suffer the largest economic growth hit among advanced economies due to the ongoing war involving Iran. The IMF downgraded the UK’s growth projection for this year from 1.3% to 0.8%, citing the energy shock caused by the conflict, fewer anticipated interest rate cuts, and the prolonged impact of higher energy prices. The Fund warned that the war threatens to disrupt the global economy and could potentially trigger a worldwide recession if it continues. It also advised central banks to exercise caution in raising interest rates amid rising inflation. The UK’s significant downgrade reflects its vulnerability as a net energy importer, making it particularly sensitive to rapid increases in energy costs. Despite the setback, the IMF expects the UK to rebound next year, projecting it to be the fastest-growing European economy within the smaller G7 group, albeit at a reduced growth rate of 1.3%. The UK government has set a strategic goal to be the fastest-growing economy in the G7. Inflation in the UK is forecast to be among the highest in the G7, with rates of 3.2% this year and 2.4% next year, before gradually returning to the Bank of England’s 2% target by 2027 as energy prices stabilize and wage growth slows due to a weakening labor market. Chancellor Rachel Reeves acknowledged the economic costs of the conflict, emphasizing that while the war is not the UK’s, the country must respond to its consequences. She highlighted that prior government measures had strengthened the UK’s economic position entering the crisis but recognized further action would be necessary. Meanwhile, US Treasury Secretary Scott Bessent framed the economic pain as a necessary short-term sacrifice for long-term security, particularly to prevent the risk of Iran acquiring nuclear weapons, underscoring the broader geopolitical stakes behind the economic fallout.