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

The UK is also forecast to have the joint highest inflation in the G7 this year, of 3.2%, and next, of 2.4%. alongside the US in 2026 and Italy in 2027.The IMF said UK inflation was expected to pick up "temporarily" this year and head towards 4%, but then return to the Bank of England's target rate of 2% by the end of 2027 as the impact of higher energy prices fades and a worsening jobs market leads to slower wage growth.Global economy at risk of recession if Iran war persists, warns IMFResponding to the IMF's forecast, Chancellor Rachel Reeves said: "The war in Iran is not our war, but it will come at a cost to the UK. These are not costs I wanted, but they are costs we will have to respond to."We entered this conflict in a stronger position because of the choices this government took to build economic stability, but there is more to do."However, US Treasury Secretary Scott Bessent told the BBC a "small bit of economic pain for weeks" was worth it for the security of eliminating the risk of Iran deploying nuclear weapons."I wonder what the hit to global GDP would be if a nuclear weapon hit London…I am saying that I am less concerned about short term forecasts, for long term security," he said.The war had removed this "tail risk" of Iran using such a weapon, he added.As the BBC has previously reported, the threat of Iranian ballistic missiles to London is remote.A government spokesperson said there was "no assessment" that Iran was trying to target Europe with missiles."But we have the military capability we need to keep Britain safe from any kind of attacks, whether it's on our soil or from abroad. We are ready to defend the country, whatever the threat," the spokesperson added.Shadow chancellor Sir Mel Stride said Reeves had "no one to blame but herself" for the size of the IMF's downgrade, after increases to employers' National Insurance and business rates."Her 'plan' to keep costs down has left us with the highest inflation in the G7, with businesses closing and the cost of living skyrocketing," he added.The UK government has been urged to step in and help people through measures such as cutting fuel duty to help keep pump prices down.But IMF chief economist Pierre-Olivier Gourinchas said countries including the UK should be "very cautious" about introducing assistance programmes. He told the BBC that despite government work to rebuild financial buffers the UK had much less room to move now, due to the war."There isn't really a lot of room to go and spend in order to support households and businesses," he said.If the UK were to bring in support measures, he said it should "stay within the envelope" of current government spending.Inflation in the UK was 3% in the year to February, which is higher than the Bank of England's target. Some analysts believe the Bank could raise interest rates later this year.However, in its outlook, the IMF cautioned central banks against raising interest rates too prematurely."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," it said.The IMF has put in a significant level of caution on its forecast given the uncertainty of events in the Gulf. Its numbers rely on a relatively fast resolution to the conflict by the second half of the year.The Fund pointed out that before the war it had expected to upgrade economic prospects, as US President Donald Trump's trade tariffs were now lower than planned, and China, Europe and Canada had simply traded more with each other to make up for US declines.But now, the IMF said "the global economy is threatened with being thrown off course".The economies of many Gulf nations such as Iran, Iraq, Qatar and Bahrain are expected to contract this year.In more severe scenarios, with the oil price averaging $110 a barrel and $125 next year, and energy prices and interest rates continuing to rise, a global recession would be a "close call".