UK hit with big IMF growth downgrade as Iran war fuels inflation

UK suffered the sharpest cut to economic growth forecasts for large rich economies by the International Monetary Fund on Tuesday, reflecting the country’s costly exposure to the inflationary impact of the Iran war.

As finance minister Rachel Reeves, who was due to ​arrive in Washington for the Fund’s Spring Meetings, said on Tuesday it was a “folly” for the US to have no ‌clear exit plan for the conflict, the IMF said Britain’s economy was now on course to grow by 0.8% in 2026, down from a previous projection of 1.3%.

It was the biggest downgrade made by the Fund for any Group of Seven economy, leaving Britain with the same growth forecast as Germany and just below ​France – but bottom of the G7 on a per capita basis.

The Fund blamed the weaker outlook on the U.S.-Israeli war with ​Iran, which initially doubled the price of natural gas that Britain relies on heavily, and on slower Bank of ⁠England interest rate cuts due to the energy price shock.

It said its global growth forecasts could be cut further if the war drags ​on.

Speaking ahead of the forecasts, Reeves told Britain’s Mirror newspaper she was “very frustrated and angry” over what she described as the United States’ ​failure to have a clear exit plan or objectives for the war in Iran.

“That is a folly and it is one that is affecting families here in the UK but also families in the U.S. and around the world,” she said.

That impact will set back promises made to voters by Prime Minister Keir Starmer and ​Reeves that they would speed up the economy to improve living standards.

The IMF said it expected Britain’s unemployment rate to rise to 5.6% ​this year, from 4.9% in 2025.

TARGETED SUPPORT

The opposition Conservative Party said the scale of the IMF growth downgrade and the expected rise in unemployment reflected Reeves’ ‌decisions, including ⁠an increase in tax on employers.

A survey published on Monday showed confidence among big British companies is at its lowest since the onset of the COVID-19 pandemic, and public expectations for inflation have soared.

The IMF said UK’s economic growth was expected to recover to 1.3% in 2027 but that still represented a 0.2% percentage-point cut from its previous projection.

UK’s inflation rate, the highest in the G7 for much of the last four years, was ​likely to peak at around 4% ​and average 3.2% over 2026 ⁠as a whole before falling to the BoE’s 2% target only at the end of 2027.

In its previous full set of forecasts, the IMF said Britain’s inflation rate was likely to fall to 2.5% in 2026.

The ​IMF’s outlook chimed with that of the Organisation for Economic Co-operation and Development which last month cut ​UK’s economic growth ⁠prospects for 2026 by the most of any major economy and said inflation was set to rise faster too.

Reeves has said she will set out her approach to helping businesses struggling with high energy prices this week and has previously said the government is considering targeted support for low-income households.

IMF Chief Economist ⁠Pierre-Olivier Gourinchas ​said Reeves faced a “delicate exercise” in balancing support with the strain on UK’s public ​finances.

“When you look at volatility in the gilt markets, it’s very, very clear the market is very sensitive to fiscal news in the UK,” Gourinchas told Reuters, referring to a ​jump in UK government borrowing costs since the start of the war.