Growth downgrade for UK as Iran war expected to boost inflation and stop interest rate cuts, says IMF

The UK economy is now expected to grow by less than 1% in 2026 following disruptions due to the war in Iran, new forecasts from the International Monetary Fund (IMF) show.

Economic growth in the UK, as measured by GDP, is now forecast to come in at just 0.8% in 2026, down from the 1.3% that the IMF predicted before the war started.

This growth downgrade of 0.5 percentage points is the largest among the G7, a group of seven rich nations of which the UK is a member.

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Every G7 country has had its growth forecast cut by the IMF in its latest forecast apart from Japan, which has remained stable.

The IMF’s latest forecast has also downgraded UK economic growth expectations for 2027, to 1.3% from the 1.5% expected in January.

The IMF also downgraded the global economic growth forecast, revising it to 3.1% this year, down 0.2 percentage points from its January prediction.

Growth downgrade is a result of Iran war, says IMF

It comes after the war between the United States and Iran has thrown the global economy into turmoil, with disruption to the global oil supply being particularly damaging.

Kristalina Georgieva, managing director of the IMF, said: “Had it not been for this shock, we would have been upgrading global growth. But now, even our most hopeful scenario involves a growth downgrade. Why? Because of infrastructure damage, supply disruptions, losses of confidence and other scarring effects.

“Even in the best case, there will be no neat and clean return to the status quo,” she added.

The direct consequences of the war have led the IMF to forecast a rise in global inflation, fewer interest rate cuts across the globe, and higher energy prices that may continue for the rest of 2026 and beyond.

Each of these factors hurt the global economic outlook.

IMF: Higher energy costs set to hit UK living standards

Heightened energy prices are set to be one of the major obstacles households will have to contend with this year following the war.

That is particularly painful to hear as many have struggled to keep up with the price of energy since the 2022 energy crisis following Russia’s invasion of Ukraine.

Cornwall Insight, an energy consultancy, expects the typical energy bill for the average household to reach £1,861 in July, 13% higher than the current average thanks to elevated energy prices in the wholesale market.

These higher energy prices will feed into inflation, with the IMF now expecting UK price growth to head towards 4% in 2026, while unemployment is expected to reach 5.6%.

Rising inflation will hit UK households as the purchasing power of their income will fall.

What is more, high inflation is likely to mean the Bank of England will keep interest rates where they are, at 3.75%, forgoing a cut until 2027, according to many economists.

All these factors have resulted in the IMF also downgrading its living standards forecast for the UK.

The body now expects minimal change in UK living standards this year, as output per person is projected to increase by a barely-noticeable 0.3% per person, the lowest in the G7

The growth downgrade is particularly bad news for the government’s target of securing the highest sustained growth in the G7, which it promised as part of its election manifesto.

Lindsay James, investment strategist at Quilter, said: “The conflict in the Middle East has effectively blown a hole open in the economic plan the Labour government was embarking on, and without a significant calming of the tensions, the UK is expected to fare the worst of the world’s developed economies.

“The government came into this year hoping it would be one of stabilisation, with Budget concerns now out of the picture and the fiscal headroom being enlarged.

“The US-Iran war, however, has blown that off course and instead resulted in the UK suffering from increased energy prices and the potential for an inflationary shock. With interest rate cuts now firmly off the cards for now, and the potential for hikes very much live, economic growth is going to be hard to come by.”