Britain’s economic outlook has been dealt a fresh blow after the International Monetary Fund (IMF) warned that escalating conflict in Iran risks tipping the global economy towards recession.
In its latest assessment, the Washington-based institution said UK growth is now expected to slow sharply, while inflation will remain stubbornly high, compounding pressure on households and businesses.
The IMF cut its forecast for UK GDP growth this year to 0.8 per cent, down from 1.3 per cent predicted as recently as January. Expectations for 2027 have also been revised lower, from 1.5 per cent to 1.3 per cent, signalling a weaker medium-term recovery.
The downgrade comes despite revised figures from the Office for National Statistics showing the economy expanded by 1.4 per cent in 2025.
Rising prices are expected to remain a central challenge. Inflation is now forecast to average 3.2 per cent in 2026, significantly above earlier estimates of 2.5 per cent, and still well above the Bank of England’s 2 per cent target. It is not expected to fall back to 2.4 per cent until the following year.
The labour market is also showing signs of strain, with unemployment projected to rise to 5.6 per cent this year, up from 4.9 per cent in 2025.
At the heart of the deteriorating outlook is a sharp rise in energy costs triggered by instability in the Middle East. Disruption to supplies, including the effective blockade of the Strait of Hormuz, has driven oil and gas prices higher, feeding through into fuel and food costs.
Petrol prices have risen by 19 per cent since the outbreak of hostilities, while diesel has surged by more than a third, intensifying inflationary pressures across the economy.
The IMF warned that, in a worst-case scenario, a global recession is now a “close call” if the conflict escalates further. Such an outcome would mark only the fifth time since 1980 that global growth has fallen below 2 per cent, placing it alongside shocks such as the 2008 financial crisis and the COVID-19 pandemic.
Writing in the report, IMF chief economist Pierre-Olivier Gourinchas said the global outlook had “abruptly darkened”, warning that the world economy had been knocked off a previously steady growth path.
Gourinchas warned: “The closure of the Strait of Hormuz and serious damage to critical production facilities in a region central to global hydrocarbon supply could cause an energy crisis on an unprecedented scale.
Shadow Chancellor Sir Mel Stride said: “Being handed the biggest downgrade in the G7 is a clear verdict on Rachel Reeves’ choices and she’s got no one to blame but herself.”
He added: “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.”
Susannah Streeter, chief investment strategist at Wealth Club, said: “As companies batten down the hatches and try to wait for the storm to pass, investment plans are being trapped. The UK is stuck in a stagflation scenario and risks of a recession are rising fast.”
She said the IMF’s downgrade is yet another “fresh blow to Chancellor Rachel Reeves and the government’s elusive search for growth.”
She added: “The UK is set to be battered by hot oil prices, an energy bill crisis and a tightening of consumer spending.”
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