The International Monetary Fund has warned that a further escalation in the Iran war could trigger a global recession, with the UK set to suffer the sharpest growth downgrade among G7 nations. In its half-yearly update, the Washington-based fund said the economic damage from the Middle East conflict was steadily rising as it cut its growth forecasts for 2026.
The IMF stated that the UK would face the joint highest inflation rate in the G7 this year and the most severe reduction in growth, even if the fallout from soaring energy costs can be contained by mid-2026. Under a worst-case scenario involving a drawn-out war and persistently higher energy prices, the world would face a close call for a global recession for only the fifth time since 1980.
The warning prompted a strong rebuke from UK Chancellor Rachel Reeves, who blamed President Donald Trump for the impact of the war. Speaking before travelling to Washington for the IMF meetings, Reeves said: 'To start a conflict without being clear what the objectives are and not being clear about how you are going to get out of it, I do think that is a folly.' She added that the war was not the UK's but would come at a cost.
The IMF lowered its forecast for US growth in 2026 by 0.1 percentage points to 2.3%, but reserved its sharpest G7 downgrade for the UK, cutting its forecast by 0.5 percentage points to 0.8% for this year. It warned that UK inflation would climb to almost 4%, double the government's 2% target. The IMF said the UK economy was particularly exposed to soaring energy prices and entered the conflict in a weaker position after sluggish growth at the end of 2025.
In its World Economic Outlook, the IMF set out three scenarios. In the central 'reference forecast', global growth would fall to 3.1% in 2026. Under an 'adverse scenario' with oil prices near $100 a barrel, growth would drop to 2.5% and inflation to 5.4%. Under a 'severe scenario' with oil above $110, global growth would collapse to about 2%, widely seen as a worldwide recession. Oil prices have been volatile, with Brent crude falling to about $95 a barrel after hopes of peace talks.
