Donald Trump’s war on Iran risks triggering a global recession, the International Monetary Fund (IMF) has warned in the latest damning assessment of the conflict’s impact on the world economy.
The influential financial body said the international outlook had “abruptly darkened” as a result of the war, which threatens to throw the global economy “off course” and could cause an energy crisis on an unprecedented scale. As oil and gas prices continue to rise, a worldwide recession could be a “close call” in a severe scenario in which there is further turmoil, the body warned.
Of the major economies, the UK faces the biggest hit to growth, with forecasts slashed for the next two years. In a further blow to Sir Keir Starmer, the IMF warns that inflation and unemployment will also rise.
Hopes for an easing of tensions in the Middle East were raised on Tuesday after President Trump suggested that negotiations with Iran over a ceasefire could restart “over the next two days”. There were also reports that Tehran is considering a pause on its shipments through the Strait of Hormuz in a bid to get talks back on track.
But the US president also issued more criticism towards the UK, reiterating his calls for Britain to expand oil and gas drilling in the North Sea to deal with the growing energy crisis.
The chancellor, Rachel Reeves, criticised Trump’s “folly” in starting a war without a clear exit strategy, saying she was “very frustrated and angry” with America’s actions in the Middle East, before she heads to Washington for the IMF’s spring meeting, where she will urge other countries to work together to respond to the crisis.
In its latest economic outlook, the IMF predicted that, in the wake of the war, UK economic growth will be weaker than previously forecast, with GDP set to grow by 0.8 per cent this year and 1.3 per cent next year. Both are below its prediction, as recently as January, of 1.3 per cent this year and 1.5 per cent in 2027. The UK economy grew last year by 1.3 per cent.
The IMF also predicts that UK inflation will rise, driven by higher energy prices, more expensive fuel and increased food costs, to an average of 3.2 per cent this year and 2.4 per cent next year. It had previously forecast averages of 2.5 per cent and 2 per cent. Petrol prices have already risen 19 per cent since the conflict started, while the cost of diesel is up by more than a third.
In another blow to the UK, the IMF predicts unemployment will rise to 5.6 per cent this year, up from last year’s 4.9 per cent.
In a foreword to the latest report, IMF economic counsellor Pierre-Olivier Gourinchas said that the international outlook had “abruptly darkened”, knocking the global economy off a steady trajectory of growth.
He added: “The closure of the Strait of Hormuz and serious damage to critical production facilities in a region central to global hydrocarbon supply could cause an energy crisis on an unprecedented scale.”
The IMF said a severe consequence of war in the Gulf over coming months would mean that global growth could be cut by 1.3 percentage points in 2026.
“This would mean a close call for a global recession (growth rate below 2 per cent), which has happened only four times since 1980, with the latest two occasions corresponding to the global financial crisis and the Covid-19 pandemic,” the report states.
When it came to the UK, the IMF said both the war in the Middle East and weak national growth late last year were to blame for Britain’s downgrade. In response, the shadow chancellor, Sir Mel Stride, said: “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. The chancellor hiked national insurance in her first budget, doubling inflation and sending unemployment soaring. She is driving the hospitality industry out of business with business rates increases, and planning the first hike in fuel duty in 15 years. Her ‘plan’ to keep costs down has left us with the highest inflation in the G7, with businesses closing and the cost of living skyrocketing.
“The Conservatives urge international partners to see Rachel Reeves as a cautionary tale of what happens when a politician has no clue what they’re doing and chooses to hammer business relentlessly.”
Ms Reeves said the war would “come at a cost to the UK” but insisted that the government was “strengthening Britain’s energy security, backing British industry and protecting households to build a Britain that is stronger, more resilient, and prepared for the future.”
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