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

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

The International Monetary Fund (IMF) has warned that the UK is set to experience the most significant economic slowdown among advanced nations due to the ongoing Iran conflict. In its latest World Economic Outlook, the Fund revised its 2024 growth forecast for the UK from 1.3% to 0.8%, attributing the downward adjustment to the war, limited interest rate cuts, and the expectation that elevated energy prices will persist into 2025.

The IMF cautioned that the conflict threatens to disrupt the global economy, with a prolonged war risking a recession. It urged central banks to delay rate hikes to avoid exacerbating economic strain. The UK’s growth contraction of 0.5 percentage points is the sharpest among developed economies, placing it at the lower end of the G7 group’s performance this year.

Global Economic Uncertainty and Inflation Outlook

The Fund highlighted that the UK’s inflation is projected to rise temporarily to 3.2% this year, surpassing the Bank of England’s target of 2%. By 2027, inflation is expected to ease to 2.4%, as energy price impacts wane and slower wage growth offsets rising costs. Meanwhile, the US and Italy are forecast to share similar inflation rates in the coming years.

“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 forecast hinges on a swift resolution to the Gulf conflict by mid-2024. Initially, it had anticipated a positive economic outlook, driven by reduced US trade tariffs and increased trade among China, Europe, and Canada. However, the war has shifted this trajectory, placing the global economy “on the brink” of a downturn.

Many Gulf nations, including Iran, Iraq, Qatar, and Bahrain, are projected to see economic contraction this year. In the most severe scenarios, with oil prices averaging $110 per barrel this year and $125 in 2025, sustained energy price increases and rising interest rates could push the world into a recession.

The UK government aims to achieve the fastest growth among G7 economies by the end of its current parliamentary term. Despite the current challenges, the IMF believes the UK will rebound in 2025, regaining its position as the top-growing economy in the smaller G7 group at a slightly slower rate of 1.3%.