IMF Upgrades UK Growth Forecast as Fears Over Iran War Diminish

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. In a July update of its World Economic Outlook, which was finalized before the latest outbreak of hostilities in the Middle East, the Washington-based organization 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. 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 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. 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 fertilizer 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.