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

The energy shock from the Iran war will hit the UK the hardest of the world's advanced economies, the International Monetary Fund (IMF) has forecast.

In its latest World Economic Outlook, the IMF cut its estimate for UK growth this year to 0.8%, from the 1.3% prediction made in January before hostilities began.

The Fund said the downgrade was due to the war, fewer interest rate cuts, and the expectation that the impact of higher energy prices would linger into next year.

It also warned the war threatened to throw the world economy "off course" and a prolonged conflict risked a global recession. The IMF urged central banks to be cautious over raising interest rates to counter higher inflation.

The UK's downgrade of half a percentage point is the largest of the world's advanced economies, with the UK now earmarked to have middling growth this year compared to its peers.

The revision is similar to that made by the OECD, which last month also predicted the UK would face the biggest hit to economic growth of the G20 major economies from the Iran war.

The IMF suggested the UK, as a net importer of energy, remained sensitive to rapid rises in energy prices.

However, it expects the UK to then recover, to again become the fastest growing European economy next year in the smaller G7 group of advanced economies, albeit at a slightly slower rate of growth of 1.3%.

The government has a key target to be the fastest growing economy in the G7 by the end of this parliament.

The UK is also forecast to have the joint highest inflation in the G7 this year, of 3.2%, and next, of 2.4%. alongside the US in 2026 and Italy in 2027.

The IMF said UK inflation was expected to pick up "temporarily" this year and head towards 4%, but then return to the Bank of England's target rate of 2% by the end of 2027 as the impact of higher energy prices fades and a worsening jobs market leads to slower wage growth.

Global economy at risk of recession if Iran war persists, warns IMF

Responding to the IMF's forecast, Chancellor Rachel Reeves said: "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.

"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."

However, US Treasury Secretary Scott Bessent told the BBC a "small bit of economic pain for weeks" was worth it for the security of eliminating the risk of Iran deploying nuclear weapons.

"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 said.

The war had removed this "tail risk" of Iran using such a weapon, he added.

As the BBC has previously reported, the threat of Iranian ballistic missiles to London is remote.

A government spokesperson said there was "no assessment" that Iran was trying to target Europe with missiles.

"But we have the military capability we need to keep Britain safe from any kind of attacks, whether it's on our soil or from abroad. We are ready to defend the country, whatever the threat," the spokesperson added.

Shadow chancellor Sir Mel Stride said Reeves had "no one to blame but herself" for the size of the IMF's downgrade, after increases to 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 added.

The UK government has been urged to step in and help people through measures such as cutting fuel duty to help keep pump prices down.

But IMF chief economist Pierre-Olivier Gourinchas said countries including the UK should be "very cautious" about introducing assistance programmes.

He told the BBC that despite government work to rebuild financial buffers the UK had much less room to move now, 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.

If the UK were to bring in support measures, he said it should "stay within the envelope" of current government spending.

Inflation in the UK was 3% in the year to February, which is higher than the Bank of England's target. Some analysts believe the Bank could raise interest rates later this year.

However, in its outlook, the IMF cautioned central banks against raising interest rates too prematurely.