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 warned that the ongoing conflict in Iran will significantly undermine the UK’s economic growth, marking it as the most affected among developed nations. The latest World Economic Outlook report reduced the UK’s growth forecast for this year to 0.8%, compared to the earlier 1.3% projection made in January. This adjustment stems from the war, fewer anticipated interest rate reductions, and the expectation that elevated energy costs will persist into 2024.
IMF officials emphasized that the war could destabilize the global economy, with prolonged hostilities potentially triggering a recession. They urged central banks to delay rate hikes, highlighting that aggressive responses to rising commodity prices might accelerate inflation but increase the risk of economic downturns. The UK’s growth revision of 0.5 percentage points is the most severe among advanced economies, positioning it for moderate expansion this year relative to its counterparts.
The Organization for Economic Co-operation and Development (OECD) recently echoed the IMF’s concerns, forecasting that the UK would suffer the largest growth setback within the G20 group due to the conflict. The IMF noted the UK’s reliance on energy imports, making it vulnerable to sharp price fluctuations. Despite this, the Fund expects the UK to rebound as the fastest-growing European economy in the G7 next year, though at a slower pace of 1.3%.
The UK government aims to be the top-performing G7 economy by the end of this parliamentary term. Inflation is projected to reach 3.2% this year and 2.4% in 2024, alongside the US in 2026 and Italy in 2027. The IMF anticipates a temporary spike in inflation to 4% this year, driven by energy costs, but predicts it will stabilize at the target rate by 2027 as energy price effects wane and labor market pressures ease.
“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 stated.
The Fund’s analysis incorporates uncertainty surrounding Gulf developments, relying on a swift conflict resolution by mid-year to maintain its projections. Prior to the war, the IMF had anticipated improved economic prospects due to reduced US tariffs and increased trade among China, Europe, and Canada. However, the current outlook suggests the global economy may veer off course.
Gulf nations like Iran, Iraq, Qatar, and Bahrain are forecast to experience economic contraction this year. In extreme cases, with oil prices averaging $110 per barrel this year and $125 in 2024, combined with rising interest rates, a global recession could become a near certainty.