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The Middle East war will hit the UK the hardest when it comes to the impact on the world’s major economies, the International Monetary Fund (IMF) has forecast.
UK gross domestic product (GDP) will grow by 0.8% this year compared to the prediction of 1.3% made in January, the IMF said in its latest World Economic Outlook.
The half a percentage downgrade is the biggest for the world’s most advanced economies.
The increase in energy prices caused by the war means inflation will be double the Bank of England’s 2% target, IMF said, with the return to 2% not taking place until the end of 2027.
The IMF also said UK unemployment is also expected to grow. It predicted it will rise to 5.6% this year, up from 4.9% in 2025.
The report warned that on a global scale, “geopolitical tensions could worsen even more than they already have — turning the situation into the largest energy crisis in modern times — or domestic political strains could erupt”.
Under the IMF’s worst-case “severe scenario”, a drawn-out war with persistently higher energy prices, the organisation said it would be “a close call for a global recession”.
GDP forecasts for the other G7 nations are:
- US: 2.3%, down from 2.4% in January
- Canada: 1.5%, down from 1.4% in January
- France: 0.9%, down from 1% in January
- Germany: 0.8%, down from 1.1% in January
- Japan: 0.7%, the same as in January
- Italy: 0.5%, down from 0.7% in January
Chancellor Rachel Reeves, who is in Washington for a meeting of global financial policymakers at the IMF, 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. I have vowed that my economic approach to this crisis will be both responsive to a changing world and responsible in the national interest, keeping inflation and interest rates in check to protect households and businesses.
“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. That is why we are strengthening Britain’s energy security, backing British industry and protecting households, to build a Britain that is stronger, more resilient, and prepared for the future.”
Shadow chancellor Sir Mel Stride said Reeves has “no one to blame but herself” for the IMF’s downgrade.
“The chancellor hiked national insurance in her first budget, doubling inflation and sending unemployment soaring”, he said.
“She is driving the hospitality industry out of business with business rates increases, and planning the first hike in fuel duty in 15 years. 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.
“The Conservatives urge international partners to see Rachel Reeves as a cautionary tale of what happens when a politician has no clue what they’re doing and chooses to hammer business relentlessly.”
Other reaction to IMF growth forecast for UK economy
Susannah Streeter, chief investment strategist, Wealth Club
”The IMF downgrade is a fresh blow to chancellor Rachel Reeves and the government’s elusive search for growth. The UK is set to be battered by hot oil prices, an energy bill crisis and a tightening of consumer spending. The economy was already flatlining even before war erupted in the Middle East, and now there is little means of resuscitation available given that interest rates look set to ramp up to curb inflation.
Hopes of fresh talks to find a resolution to the conflict are providing a balm of sorts. One to two interest rate increases are now being priced into financial markets instead of the scary three to even four hikes temporarily forecast, but it’s still going to be tough going ahead if borrowing costs rise further. Plans for a big bang of home construction with 1.5 million new dwellings targeted by the government have turned into more of a whimper.
“Property companies have scaled back ambitions as the Middle East crisis has hurt demand, and high uncertainty lingers. The government’s latest lever to pull is a closer relationship with Europe, but a deal on accepting single market rules will take time to be agreed, so it won’t nudge growth forward any time soon.
“As companies batten down the hatches and try to wait for the storm to pass, investment plans are being trapped. The UK is stuck in a stagflation scenario and risks of a recession are rising fast.”