IMF Forecasts UK Faces Largest Growth Impact from Iran Conflict
The International Monetary Fund (IMF) has projected that the energy shock resulting from the war in Iran will have the most significant adverse effect on the United Kingdom among the world's advanced economies.
In its latest World Economic Outlook report, the IMF revised down its forecast for UK economic growth in 2024 to 0.8%, a reduction from the 1.3% growth predicted in January before the outbreak of hostilities.
The IMF attributed this downgrade to the ongoing conflict, fewer anticipated interest rate cuts, and the expectation that elevated energy prices will continue to affect the economy into the following year.
Furthermore, the Fund cautioned that the war poses a risk of diverting the global economy "off course," and warned that a prolonged conflict could precipitate a global recession. It advised central banks to exercise caution in raising interest rates to combat inflationary pressures.
UK Growth Downgrade Largest Among Advanced Economies
The UK's half-percentage-point reduction in growth forecast is the most substantial among advanced economies worldwide, positioning the UK for moderate growth relative to its peers this year.
This revision aligns with a similar assessment by the Organisation for Economic Co-operation and Development (OECD) last month, which also identified the UK as facing the greatest economic growth impact from the Iran war among G20 major economies.
The IMF highlighted the UK's vulnerability as a net energy importer, which makes it particularly sensitive to rapid increases in energy prices.
Despite this, the IMF expects the UK to recover in 2025, projecting it to be the fastest-growing European economy within the smaller G7 group of advanced economies, albeit with a slightly reduced growth rate of 1.3%.
The UK government has set a strategic objective to become the fastest-growing economy in the G7 by the end of the current parliamentary term.
Inflation Outlook and Monetary Policy Considerations
The UK is also forecast to experience the joint highest inflation rate in the G7 this year, at 3.2%, and in 2025 at 2.4%, sharing this position with the United States in 2026 and Italy in 2027.
The IMF anticipates that UK inflation will rise "temporarily" to nearly 4% in 2024 before returning to the target rate by the end of 2027. This decline is expected as the impact of higher energy prices diminishes and a weakening labor market leads to slower wage growth.
Inflation in the UK was recorded at 3% in the year to February 2024, exceeding the Bank of England's 2% target. Some analysts predict that the Bank of England may raise interest rates later this year.
In its outlook, the IMF cautioned central banks against premature interest rate hikes.
"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.
Uncertainty and Global Economic Risks
The IMF emphasized a high degree of caution in its forecasts due to the uncertainty surrounding developments in the Gulf region. Its projections assume a relatively swift resolution to the conflict by the second half of 2024.
The Fund noted that prior to the war, it had anticipated upward revisions to global economic prospects, as US President Donald Trump's trade tariffs were lower than initially planned, and China, Europe, and Canada had increased trade among themselves to compensate for reduced US trade.
"The global economy is threatened with being thrown off course," the IMF stated.
The economies of several Gulf nations, including Iran, Iraq, Qatar, and Bahrain, are expected to contract in 2024.
In more severe scenarios, with oil prices averaging $110 per barrel in 2024 and $125 in 2025, accompanied by continued rises in energy prices and interest rates, the IMF warned that a global recession would be a "close call."
