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

UK Faces Largest Growth Setback Amid Iran Conflict, IMF Warns

The International Monetary Fund (IMF) has indicated that the UK will suffer the most significant economic strain among major economies due to the Iran war, according to its latest World Economic Outlook. The Fund revised its growth forecast for the UK this year to 0.8%, down from the 1.3% projection made in January before hostilities began. This adjustment is attributed to the war, limited interest rate cuts, and the anticipation that elevated energy costs will persist into 2025.

Global Economic Uncertainty

The IMF cautioned that the ongoing conflict threatens to disrupt the global economy, potentially leading to a recession if the war continues. It urged central banks to temper their approach to rate hikes, as premature actions could accelerate inflation but also risk deeper economic downturns. The UK’s growth contraction of 0.5 percentage points marks the sharpest decline among advanced economies, positioning it with moderate expansion compared to its counterparts.

The Organisation for Economic Co-operation and Development (OECD) recently echoed this assessment, predicting the UK would face the most severe impact on economic performance among G20 nations from the Iran war. The IMF highlighted the UK’s reliance on imported energy, making it particularly vulnerable to sudden price surges. Despite the current setback, the Fund anticipates a recovery, projecting the UK to reclaim the fastest growth in the G7 group of developed economies next year, though at a slightly slower pace of 1.3%.

Government and Opposition Reactions

“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. She emphasized that the UK entered the conflict from a stronger economic position, thanks to prior government decisions aimed at stability, though more action is needed.

“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,” argued Sir Mel Stride, the shadow chancellor. He blamed the current situation on Reeves’ policies, including recent increases to employers’ National Insurance and business rates.

Inflation in the UK stood at 3% for the year to February, surpassing the Bank of England’s target. Analysts anticipate further rate hikes later this year, but the IMF advised against rushing decisions, noting that aggressive responses to volatile commodity prices could lead to a recession later. The Fund’s projections depend on a swift resolution to the Gulf conflict by the second half of 2024.

Risks of Prolonged Conflict

The IMF warned that if the war drags on, energy prices could rise to $110 per barrel this year and $125 next year, exacerbating inflation and potentially triggering a global recession. Meanwhile, Gulf economies like Iran, Iraq, Qatar, and Bahrain are expected to contract this year, compounding the challenges for the UK and other nations.

The Fund acknowledged that its revised forecast reflects growing concerns about the Gulf’s economic stability. Initially, it had planned to improve growth expectations due to reduced US trade tariffs and increased trade among China, Europe, and Canada. However, the conflict has shifted the outlook, with the global economy now at risk of being derailed.