IMF Cuts UK Growth Forecast as Iran War Drives Energy Shock

The United Kingdom will experience the largest economic growth downgrade among advanced economies as a result of the war involving Iran, according to the latest outlook from the International Monetary Fund (IMF).

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In its updated World Economic Outlook, the IMF reduced its forecast for UK growth in 2026 to 0.8%, down from the 1.3% projection made in January before hostilities began. The organisation attributed the downgrade to the economic fallout from the conflict, fewer expected interest rate cuts, and prolonged pressure from higher energy prices.

The IMF warned that the conflict risked destabilising the global economy and said a prolonged war could push the world toward recession. It also advised central banks to avoid tightening monetary policy too aggressively in response to energy-driven inflation.

Energy prices weigh on UK outlook

The UK’s forecast downgrade of half a percentage point is the largest among advanced economies, leaving the country with moderate growth compared with its peers.

The IMF said Britain remains particularly exposed to energy price spikes because it is a net importer of energy. Rising costs linked to the conflict are expected to weigh on economic activity through this year and potentially into next.

A similar warning was issued recently by the Organisation for Economic Co-operation and Development, which also concluded that the UK would face the biggest growth hit among G20 economies as a result of the conflict.

Despite the short-term slowdown, the IMF expects the UK economy to recover somewhat in 2027. Growth is forecast to reach 1.3% next year, potentially making Britain the fastest-growing European economy within the Group of Seven of advanced economies, although at a slightly slower pace than previously expected.

The UK government has set a goal of achieving the strongest growth rate in the G7 before the current parliamentary term ends.

Inflation expected to rise temporarily

Inflation in the UK is forecast to remain among the highest in the G7. The IMF predicts inflation will average 3.2% this year before easing to 2.4% in 2027, levels similar to those expected in the United States and Italy during that period.

The IMF expects UK inflation to rise temporarily towards 4% this year before gradually falling back to the Bank of England’s target rate of 2% by the end of 2027. The decline would be driven by easing energy pressures and slower wage growth as labour market conditions weaken.

UK inflation stood at 3% in the year to February, already above the central bank’s target. Some analysts believe interest rates could increase later this year, though the IMF cautioned against tightening policy too quickly.

Political reactions to the forecast

UK Chancellor Rachel Reeves acknowledged the economic impact of the conflict but argued Britain was better prepared because of earlier government decisions aimed at strengthening financial stability.

“The war in Iran is not our war, but it will come at a cost to the UK,” she said, adding that further action would be needed to respond to the economic consequences.

However, Scott Bessent, the US Treasury Secretary, argued that short-term economic disruption was justified if it reduced the risk of Iran developing nuclear weapons. Speaking to the BBC, he said the long-term security benefits outweighed temporary economic damage.

The UK government has previously stated there is no intelligence assessment indicating Iran is attempting to target Europe with missiles.

Opposition politicians also criticised the economic outlook. Conservative shadow chancellor Mel Stride blamed government tax policies for worsening the slowdown, while Liberal Democrat Treasury spokesperson Daisy Cooper criticised the conflict itself and those who supported it.

Limited room for government support

The IMF warned governments should be cautious about introducing large financial support programmes to offset the impact of rising energy costs.

The Fund’s chief economist, Pierre-Olivier Gourinchas, said the UK’s fiscal position meant there was limited scope for additional spending to help households and businesses.

He added that any support measures should remain within existing spending limits.

The IMF’s forecast assumes the conflict will ease by the second half of the year. If fighting continues and oil prices rise to around $110 per barrel this year and $125 next year, the IMF warned the global economy could come close to recession.

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Adapted by ASEAN Now. Source 15 April 2026