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

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

IMF Downgrades UK Economic Outlook Amid Global Tensions

By William Schomberg

WASHINGTON, April 14 (Reuters) - Britain suffered the sharpest cut to economic growth forecasts for large rich economies by the International Monetary Fund due largely to the Iran war, and finance minister Rachel Reeves slammed the "folly" of the U.S. strategy for the conflict.

IMF Forecasts and Economic Impact

The IMF said on Tuesday that Britain's economy was now on course to grow by only 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.

Link to Iran Conflict and Energy Prices

The IMF linked the weaker outlook to the U.S.-Israeli war with Iran, which initially doubled the price of natural gas that Britain relies on heavily, and on the likelihood of 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.

Political Reactions

Speaking ahead of the publication of the forecasts, Reeves said 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 in an interview with The Mirror newspaper.

Domestic Economic Consequences

The effects of the energy price jump will set back promises made to voters by Prime Minister Keir Starmer and Reeves that they said 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.

Policy Responses and Future Outlook

Targeted Support and Political Debate

TARGETED SUPPORT

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

Sam Alvis, associate director at the Institute for Public Policy Research, a think tank, said the weak outlook underlined how the UK economy remained at the mercy of global crises.

"Our dependence on volatile fossil fuels leaves households and businesses exposed to yet another wave of energy price shocks," Alvis said.

"We will need to protect people from the effects of this now but to stop us having to do so again in the future we need to invest in electrification and clean, homegrown energy."

Long-Term Growth and Inflation Projections

The IMF said Britain'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.

Britain'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.

Comparisons with Other Institutions

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

Government Measures and Challenges

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 Britain's public finances.

(Reporting by William Schomberg; Additional reporting by David Lawder; Editing by Susan Fenton and Keith Weir)