UK Faces Biggest Growth and Price Shock from Iran War, IMF Says

Article content(Bloomberg) — Britain will suffer the biggest economic shock from the Iran war of any major advanced economy and struggle to cushion the blow through either interest rate cuts or state support, according to the International Monetary Fund.Sign In or Create an AccountEmail AddressContinueor View more offersArticle contentThe global financial supervisor cut its UK growth forecast by 0.5 percentage points this year and 0.2 percentage points in 2027, a steeper downgrade since January than it gave the rest of the Group of Seven’s leading nations. The UK is hardest hit due to the “large negative effect” of being a “net energy-importing” economy, the IMF said. Germany was next worst affected, with a 0.6 percentage point downgrade across the two years.Article contentWe apologize, but this video has failed to load.Try refreshing your browser, ortap here to see other videos from our team.Article contentArticle contentThe numbers come at a bad time for Chancellor of the Exchequer Rachel Reeves who heads to Washington for the IMF spring meetings this week. The OECD also said Britain would be affected more than peer economies last month, while Bloomberg Economics predicts the country is “facing a fresh bout of stagflation.”Article contentTop StoriesGet the latest headlines, breaking news and columns.There was an error, please provide a valid email address.Sign UpBy signing up you consent to receive the above newsletter from Postmedia Network Inc.Thanks for signing up!A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againInterested in more newsletters? Browse here.Article contentThe IMF downgraded global growth to 3.1% from 3.3% this year due to the Iran war, assuming the disruption fades by mid-2026. It warned that if the Strait of Hormuz remains blockaded for longer, hampering deliveries of vital oil, gas and fertilizer stocks, the impact would even more severe.Article contentWith growth stalling and prices rising, the UK’s Labour government faces another challenge. It has raised the prospect of a sharp hike in defense spending along with measures to protect households from rising energy and food prices.Article contentBefore departing for the US, Reeves promised to help families and businesses with “the cost of instability they did not cause,” pledging that the government will have to respond. Still, she insisted “stable public finances” were vital.Article contentIf the IMF’s World Economic Outlook forecasts play out, the Chancellor may have few options as her fiscal room narrows from the £23.6 billion ($32 billion) set aside in March. The fund expects the UK to grow 0.8% this year, equal fourth fastest in the G7 ahead of Italy and Japan, and 1.3% in 2027, third fastest after Canada and the US. On a GDP per person basis, the UK will be the slowest growing G7 economy this year.Article contentArticle contentUK households face a price and jobs shock, the forecasts also showed. Inflation will “pick up again temporarily toward 4%,” averaging 3.2% this year – above G7 peers — before falling to 2% by the end of 2027. Unemployment will rise to 5.6% this year from 5.2% currently, implying another 150,000 people will drop out of work.Article contentTargeted help for the most vulnerable would be appropriate, the IMF said, but it cautioned high-debt countries against borrowing to fund any support measures. Taxes should rise or spending cut to fund giveaways for those countries that are fiscally constrained, it recommended. The UK’s debt to GDP ratio is high at close to 100%.Article contentThe Bank of England is unlikely to come to the rescue, the IMF warned. Central banks “must guard against prolonged supply shocks destabilizing inflation expectations,” it said, and can only “look through” the energy shock if inflation expectations remain well anchored. Markets expect close to two quarter point rate rises this year, up from 3.75% currently.Article content“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,” said Mel Stride, the Conservatives’ shadow chancellor.Article contentTrending Forcing people to pay a moral tax if they leave the country won't inspire them to stay Personal Finance Posthaste: Canadian dollar is being dumped from FX reserves at a record pace. What's going on? 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Forcing people to pay a moral tax if they leave the country won't inspire them to stay Personal Finance Posthaste: Canadian dollar is being dumped from FX reserves at a record pace. What's going on? News Canada needs to invest $1.8 trillion over the next decade in six key sectors, says RBC News Travel data from March show number of Canadians returning from trips across the U.S. border are stuck at depressed levels Economy Why timing the bottom of Canada's roller-coaster real estate market may be harder than you think Real Estate