UK economic growth forecasts slashed as IMF warns of higher energy prices
Newsflash: The International Monetary Fund has cut its forecast for UK growth this year and in 2026, as the Iran war hurts the global economy.
The UK has been hit by the sharpest growth downgrade in the G7 in the IMF’s new economic forecasts, just released, at its spring meeting in Washington DC.
UK GDP is now expected to rise by just 0.8% this year, down from a previous forecast of 1.3% – a bigger downgrade than other major economies.
The UK’s growth forecast for next year has been cut from 1.5% to 1.3%.
The Fund says:
In the United Kingdom, the war and a slower pace of monetary easing mean that growth is projected to decline from 1.3 percent in 2025 to 0.8 percent in 2026, a downward revision of 0.5 percentage point relative to the October 2025 forecast.
Growth is projected to recover to 1.3 percent in 2027, slower than expected before the war as the impact of higher energy prices linger.
In a blow to households, IMF economists also predict inflation will rise towards 4%.
But, inflation is then expected to return to target by the end of 2027 as the effects of higher energy prices fade and a weakening labour market puts downward pressure on wage growth.
Key events
Bank of England policymaker Megan Greene said on Tuesday that the upside risks to inflation were “paramount” to her thinking on the outlook for interest rates as Britain grapples with the economic fallout from the Iran war, Reuters reports.
Greene told an event organised by the Atlantic Council think tank in Washington:
“There are definitely downside risks to demand, and I think that’s important. But I think that the upside risks to inflation are paramount.”
Greene said, however, it could take months for evidence of second-round effects from the expected increase in headline inflation to appear, and data so far painted a “mixed picture”.
IMF warns Middle East war driving up financial stability risks
The IMF is also warning today that global financial stability risks are “elevated”, due to the Iran war.
The Fund’s latest Global Financial Stability Report flags the risk that the inflationary shock from the conflict could cause funding markets to tighten, fuelling volatility in the bond markets.
The report says:
The global financial system is confronting the ongoing war in the Middle East, potential inflationary pressures, rising risks of further tightening in financial conditions, and several amplification channels that could lead from market turmoil to financial instability.
The IMF also identifies private credit defaults and a slowdown in AI investment as additional risks to stability.
UK builders strugging to hire young people
Miatta Mbriwa
A chief executive at an influential UK school trust has warned that the built environment sector is struggling to hire young people, despite the UK’s youth employment crisis.
Speaking at a committee meeting in parliament this morning, Terry Watts, chief-executive of the Built Environment School Trust, a charity aimed at improving access for young people to work in the sector, said that awareness around opportunities for young people is “not in a good state”, saying that although “exceptionally good programmes” that generate interest around the built environment exist, he described them as “very patchy,” and “uncoordinated.”
Watts also cited the issues that such programmes “tend to be focused around London and the south-east”, as well as how costly they can be to run on a daily basis.
Despite the built environment sector employing 12% of Britain’s workforce, and generating around 17% of the country’s GDP, Watts said of the thousands of students he works with, “94 per cent of them don’t want to work in construction when we meet them.”
And although youth unemployment has risen to its highest level since 2014 (16.1%), with concerns mounting over young people finding it harder to be hired across many sectors, they still appear to not be attracted to careers in the built environment.
It has a “no one wants to do that” stereotype, Watts said, adding that other industries including finance and tech are increasingly being seen as more attractive career paths.
He told a committee of politicians and Lords that there needs to be more work to help the sector appeal to young people, saying:
“We need people to aspire to go into this sector where you can start as a labourer on site. 20 years forward, you’re running a £10-20m turnover building company.
“There’s lots of social mobility opportunities for this sector. If only people knew they were there, they could aspire to do them.”
Professor Costas Milas of the University of Liverpool has spotted an interesting line in the IMF’s World Economic Outlook report, on defence spending and GDP growth:
IMF’s latest World Economic Outlook (in Chapter 2) pools together economic information from a panel of countries to find that sizeable defence booms are followed by higher real GDP; in fact, real GDP ends up 5% higher over a five-year horizon; at the same time, Consumer Prices increase by 3% but this impact is only transitory.
The main channel through which GDP rises is much stronger public investment. The IMF flags the obvious: how to finance extra defence spending is not straightforward but hints to a combination of higher taxes, lower government expenditure and extra borrowing.
A tricky decision for Rachel Reeves in terms of finding the best possible financing mix for additional defence investment to end up at approximately 5% of UK GDP in the medium run.
TUC: British households must not pay the price for “Trump-slump”
The TUC are calling for a temporary cap on gas prices to help UK businesses through the energy shock.
TUC general secretary Paul Nowak also firmly blamed Donald Trump’s decision to trigger conflict in the Middle East for the UK’s growth downgrade:
“This is the last thing working families need.
“Donald Trump’s illegal war of choice risks making us all poorer. The longer it goes on, the bigger the threat to our economy and to living standards.
“Households and firms are already being hammered by Trumpflation – especially gas-dependent industries like chemicals, ceramics and glass.
“That’s why the government must urgently bring forward a temporary targeted gas price cap to stabilise the price of gas for critical industries and protect British manufacturing – and press the accelerator on the energy support scheme making sure it reaches crucial sectors like steel.
“And longer-term, ministers must go all out to protect the country from a sustained Trump-slump – and ensure those with the deepest pockets shoulder the cost.”
Quilter: IMF has delivered ‘a severe reality check to Rachel Reeves’
The IMF’s growth downgrades show that the Middle East conflict has ‘blown a hole’ in the government’s economic plan, warns Lindsay James, investment strategist at wealth manager Quilter.
“The IMF has delivered a severe reality check to Rachel Reeves and the rest of UK government, with economic growth forecasts slashed heavily. It now expected economic growth for this year to come in at 0.8%, down from the 1.3% growth that was forecasted at the beginning of the year. 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 largened. 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.
“It is hoped that much of this economic shock will be short-lived, provided the conflict does not drag on. The IMF expects the UK to recover to become the fastest growing G7 European economy in 2027 with growth of 1.3%, but with inflation also expected to be the highest amongst peers, there remains risk that further revisions could be made.
“None of this, of course, is helped by the fact that the longer the conflict goes on, the greater potential there is for an economic recession. The original ceasefire agreed already appears to have broken down, and while the bombing may have calmed, tensions remain ratcheted up. Even with any resolution, things are unlikely to go back to normal and we should now have to get familiar with elevated oil and gas prices for the foreseeable future.”
IMF lays bare UK’s exposure to global shocks and fossil fuel price spikes, says IPPR
The IMF has “laid bare” the UK’s exposure to global shocks and fossil fuel price spikes by cutting its growth forecasts (see earlier post), says the IPPR think tank.
Responding to the latest IMF World Economic Outlook, Sam Alvis, associate director at IPPR, says:
“The IMF’s latest outlook paints a bleak picture and underlines a hard truth: the UK’s economy is still at the mercy of global crises.
Our dependence on volatile fossil fuels leaves households and businesses exposed to yet another wave of energy price shocks. We will need to protect people from the effects of this now but to stop us having to do so again in the future we need to invest in electrification and clean, homegrown energy.”
Germany has been hit by the biggest growth downgrade among eurozone countries.
In its new World Economic Outlook, the IMF expects German growth rates of 0.8% in 2026 and 1.2% in 2027, down 0.3 percentage points in both years.
The euro area is forecast to grow by 1.1% in 2026 and 1.2% in 2027 is forecast, 0.2 percentage points less in each year than previously expected.
Gourinchas: UK downgrade due to Iran war, and weak growth in H2 2025
Q: Why is the UK’s downgrade bigger than other major economies?
There are two main reasons, replies IMF chief economist Pierre-Olivier Gourinchas:
Firstly, of course, the war in the Middle East – the jump in energy prices hurts the UK as it is “highly reliant” on gas for its energy mix.
Gourinchas explains:
Now a lot of this gas is produced domestically, but there is still a part of it that is imported. And, the part is imported is at market prices. It’s much more expensive. And that sets the price for energy in the UK in an environment in which, gas reserves are relatively low, when you compare them to other European countries.
So there is more of a pass through of gas prices into wholesale prices of energy, even if households are protected temporarily because there are there are some measures in place.
Secondly, the UK economy had a “relatively weak performance” in the second half of 2025, so there is a ‘carryover effect’ into 2026.
Q: Do you fear the UK could fall into a wage-price spiral again?
Gourinchas argues that the UK economy still has a negative output gap, which is moderating some wage pressures.
He says:
Right now there is little evidence that there are strong wage pressures in the UK economy and therefore our estimates of core inflation are not increasing too much.
The IMF downgrade is a fresh blow to Chancellor Rachel Reeves and the government’s “elusive search for growth”, says Susannah Streeter, chief investment strategist at Wealth Club:
The UK is set to be battered by hot oil prices, an energy bill crisis and a tightening of consumer spending. The economy was already flatlining even before war erupted in the Middle East, and now there is little means of resuscitation available given that interest rates look set to ramp up to curb inflation.
Hopes of fresh talks to find a resolution to the conflict are providing a balm of sorts. One to two interest rate increases are now being priced into financial markets instead of the scary three to even four hikes temporarily forecast, but it’s still going to be tough going ahead if borrowing costs rise further.
Plans for a big bang of home construction with 1.5 million new dwellings targeted by the government have turned into more of a whimper. Property companies have scaled back ambitions as the Middle East crisis has hurt demand, and high uncertainty lingers. The government’s latest lever to pull is a closer relationship with Europe, but a deal on accepting single market rules will take time to be agreed, so it won’t nudge growth forward any time soon.
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.’’
IMF: Iran war shock is comparable to the 1974 oil price shock.
The energy shock from the Iran war is as severe as the 1974 oil price shock, the IMF says, but the world economy is in better shape to cope.
Pierre-Olivier Gourinchas, chief economist at the IMF, tells today’s press conference that if the conflict were to stop today, the oil shortfall for the year would be comparable to the shock from the 1970s in terms of how much oil has been withdrawn from the market on an annual average basis.
He says:
So, the shock is comparable to the 1974 oil price shock.
But, there are important differences, Gourinchas says:
The first one is that the global economy is much less oil dependent now than it was back then, and it is much more efficient in terms of how much it needs oil to produce GDP.
Secondly, back in the ‘70s, central banks were focused on supporting activity rather than reining in inflation. “That led to macroeconomic instability,”Gourinchas explains.
