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

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

The International Monetary Fund (IMF) has projected that the UK will endure the most substantial growth setback among advanced economies due to the energy crisis sparked by the Iran war. Its latest World Economic Outlook revised the nation’s 2024 growth forecast downward to 0.8%, down from the earlier 1.3% estimate made in January prior to hostilities. The Fund attributed this adjustment to the war, reduced interest rate cuts, and the anticipation that elevated energy costs will persist into 2025.

The war, according to the IMF, poses a risk to global economic stability, potentially derailing the world economy from its current trajectory. A prolonged conflict could lead to a global recession, prompting the Fund to advise central banks to temper their rate-hiking measures to combat inflation. The UK’s growth revision of half a percentage point is the largest among G7 nations, placing it in the middle of the pack compared to its counterparts.

OECD aligns with IMF’s assessment

The Organisation for Economic Co-operation and Development (OECD) recently echoed the IMF’s concerns, forecasting the UK would experience the greatest economic slowdown within the G20 group. The IMF highlighted the UK’s status as a net energy importer, making it particularly vulnerable to abrupt price surges. However, it anticipates a rebound, with the UK expected to regain its position as the fastest-growing European economy in 2025, albeit at a slightly diminished rate of 1.3%.

The UK government has set a goal to lead the G7 in growth by the end of its parliamentary term. Simultaneously, the country is forecast to face joint highest inflation in the G7 this year, reaching 3.2%, and 2.4% in 2026. Inflation in the UK stood at 3% for the year ending February, surpassing the Bank of England’s target of 2%. Analysts speculate the Bank may increase rates later this year.

“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 said.

The IMF’s forecast incorporates a significant degree of caution, reflecting uncertainty over Gulf region developments. Its projections depend on a swift resolution of the conflict by mid-year. Before the war, the Fund had anticipated improved economic outlooks, driven by lower-than-expected US tariffs and increased trade among China, Europe, and Canada. Yet, the ongoing conflict has shifted this outlook, with the Fund warning of a “close call” for a global recession if oil prices rise to $110 per barrel this year and $125 in 2025.

Many Gulf economies, including Iran, Iraq, Qatar, and Bahrain, are predicted to contract in 2024. The IMF emphasized that its current estimates rely on a rapid conflict resolution, as prolonged hostilities could amplify inflationary pressures and further strain the global economic recovery.