UK Growth Downturn Labeled Worst Among Advanced Economies by IMF

The International Monetary Fund (IMF) has projected that the UK will experience the most severe economic slowdown among major economies due to the ongoing Iran war. This assessment comes as the Fund revised its growth forecast for the year to 0.8%, a sharp drop from the 1.3% projection made in January before hostilities erupted. The report attributes this decline to rising energy costs, reduced monetary stimulus, and the anticipation that elevated fuel prices will persist into 2025.

Among its key warnings, the IMF highlighted that the conflict risks disrupting global economic momentum, potentially pushing the world into a recession if tensions escalate. It advised central banks to tread carefully when adjusting interest rates to counter inflationary pressures, emphasizing that premature hikes could derail recovery efforts. The UK’s growth reduction of 0.5 percentage points stands out as the largest among advanced economies, positioning it as a weaker performer compared to its counterparts.

Meanwhile, inflation in the UK is projected to rise to 3.2% this year, with the US and Italy expected to follow closely in 2026 and 2027 respectively. The IMF noted that temporary price spikes will likely ease by late 2027 as energy cost impacts fade and wage growth slows amid a tightening labor market. However, current inflation levels already surpass the Bank of England’s target, raising questions about the central bank’s rate decisions later this year.

“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,” stated Chancellor Rachel Reeves. She added that the government entered the conflict with a stronger economic foundation, though more challenges remain.

Shadow chancellor Sir Mel Stride criticized the downgrade, linking it to the government’s recent tax hikes on employers and businesses. “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 argued. Liberal Democrat Treasury spokesperson Daisy Cooper echoed this sentiment, blaming “Trump’s idiotic war and all those who cheered it on” for the economic strain, calling for stronger domestic measures to offset external shocks.

IMF chief economist Pierre-Olivier Gourinchas urged restraint in introducing support programs, noting that the UK has limited fiscal space due to the conflict. “There isn’t really a lot of room to go and spend in order to support households and businesses,” he explained, suggesting any aid should align with existing spending plans. The Fund also emphasized that its forecast hinges on a swift resolution to the Gulf crisis by mid-year, underlining the uncertainty surrounding the conflict’s duration.