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

UK Experiencing Greatest Economic Impact from Iran Conflict, IMF Reports

The International Monetary Fund (IMF) has warned that the UK will bear the most severe economic consequences among advanced nations from the ongoing conflict with Iran. This assessment comes as the Fund revised its growth projection for 2024 to 0.8%, down from the earlier 1.3% estimate provided in January before the war escalated.

The downgrade is attributed to multiple factors, including the war’s effects, reduced frequency of interest rate cuts, and the anticipated persistence of elevated energy prices into 2025. The IMF also cautioned that the conflict could derail global economic progress, with a drawn-out situation risking a recession.

The UK’s growth outlook has been cut by half a percentage point, marking the largest decline among developed economies. This aligns with a similar adjustment by the OECD, which recently forecasted the UK would face the steepest drop in growth among G20 major economies due to the Iran war.

Energy Prices and Inflation Trends

The Fund emphasized that the UK, as a net importer of energy, is particularly exposed to rapid increases in fuel costs. While it anticipates a recovery, the country is expected to regain its position as the fastest-growing European economy in the G7 in 2025, albeit at a slightly slower pace of 1.3% growth.

“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 noted.

UK inflation is projected to reach 3.2% this year, surpassing the Bank of England’s target of 2%. By 2025, it is expected to drop to 2.4%, though the US and Italy are also likely to see inflationary pressures in 2026 and 2027 respectively. The Fund warned that the current spike in energy prices may temporarily push inflation higher, but it anticipates a return to target levels by the end of 2027 as energy costs stabilize and wage growth slows.

Global Uncertainty and Economic Outlook

Despite initial optimism about upgrading growth forecasts, the IMF now warns that the Gulf region’s instability could throw the global economy off track. The Fund’s projections depend on a swift resolution to the conflict by mid-2024, as it had previously expected economic prospects to improve due to lower US trade tariffs and increased trade among China, Europe, and Canada.

Many Gulf economies, including Iran, Iraq, Qatar, and Bahrain, are forecast to contract in 2024. In severe scenarios where oil prices reach $110 per barrel this year and $125 next year, the IMF described a global recession as a “close call.”