The International Monetary Fund (IMF) has upgraded its growth forecast for the UK, while leaving those for other G7 countries weaker or unchanged, amid hopes the economic impact of the Iran war may be less severe than feared.
UK Growth Forecast Raised to 1%
In a July update of its World Economic Outlook, which was finalised before the latest outbreak of hostilities in the Middle East, the Washington-based organisation projected UK gross domestic product to grow by 1% this year – up 0.2 percentage points from its April forecast.
That would make the UK the third fastest-growing economy in the G7 in 2026 – behind the US, whose 2.3% growth rate has been boosted by the AI investment boom; and oil-exporting Canada, at 1.1%.
The modest upgrade is the latest hint that the incoming prime minister, Andy Burnham, may inherit an economy less battered by the Middle East conflict than previously feared.
Inflation and Interest Rate Outlook
The IMF’s growth forecast for the UK next year is unchanged at 1.3%, as inflation falls back towards the government’s 2% target by the middle of 2027. Meanwhile, official data showed UK inflation unexpectedly remained unchanged in May, with financial markets pricing in just one interest rate rise by next spring.
At the height of the conflict it was feared Bank of England policymakers might resort to several successive increases to tackle the impact of soaring prices – with knock-on effects for consumers and businesses.
Global Oil Prices and Economic Impact
Global oil prices have fallen sharply since the announcement of the memorandum of understanding between the US and Iran last month. However, prices surged on Wednesday amid fresh uncertainty about the prospects for peace after Donald Trump described the ceasefire as “over”.
The IMF’s forecast for global economic growth is broadly unchanged since April, at 3% this year and 3.4% next – down from an average of 3.5% over the previous two years.
AI Boom Offsets Energy Costs
The IMF explains that the AI boom has helped to cushion the impact of costlier energy resulting from the war – though some countries have been hit much harder than others. “The modest slowdown reflects the effects of the war in the Middle East being partly offset by accelerated demand-driven momentum in the global technology cycle, thanks to advances in artificial intelligence (AI) and its adoption,” it says.
Oil prices have risen less dramatically than some analysts feared, meanwhile, due to the drawdown of emergency stockpiles. The IMF points out that the price of fossil fuels for consumers has varied significantly, according to a wide range of factors, including geographical location. Retail gasoline prices have risen by 30% in Asia, for example, but only 15% in Latin America, while liquefied natural gas prices are up 50% in Asia and 25% in Europe.
Worst-Hit Economies and Risks
The countries whose economies have been worst hit are those that are energy importers, but have played little part in global technology supply chains. The IMF also warned that the full effects of the crisis, which has affected fertiliser prices as well as the cost of fuel, has yet to be felt – and risks remain to the downside.
In particular, it singles out the danger of a resumption of hostilities, warning that “renewed conflict would propagate through a further increase in commodity prices and extended volatility, supply shortages, and exchange rate pressures”.
Another threat to the outlook highlighted by the IMF is what it calls “a possible correction in technology-driven expectations” that would hit financial markets and impair global trade. “In such a scenario, investment in technology-intensive sectors could retrench abruptly, and frothy equity valuations – particularly in AI-exporting economies and markets with high concentration in technology firms – could correct sharply,” it says.
Political Implications
Burnham, who is expected to take office on 17 July unless a last-minute challenger emerges, has not yet announced who would serve as his chancellor, but will face early questions about his plans for tax and spend in the run-up to an autumn budget.
Responding to the IMF report, a spokesperson for the incoming government said: “Our choices mean the economy is in a better position to deal with the costs of the war in Iran while kickstarting long-term growth by focusing on our three big choices – boosting AI, regional growth and strengthening trade with the EU.”
