A further escalation in the Iran war could trigger a global recession that would affect the UK more than any of the other G7 nations, the International Monetary Fund has warned.
Against an increasingly volatile backdrop, the Washington-based fund said the economic damage from the Middle East conflict was steadily rising as it cut its growth forecasts for 2026 based on the impact of the war so far.
In its half-yearly update, the IMF said the UK would suffer the sharpest growth downgrade and joint highest inflation rate in the G7 this year, even if the fallout from soaring energy costs can be contained by the middle of 2026.
However, under a worst-case “severe scenario”, involving a drawn-out war and persistently higher energy prices, it said the world would face “a close call for a global recession” for only the fifth time since 1980.
The IMF’s warning prompted the UK chancellor, Rachel Reeves, into the British government’s harshest rebuke yet to President Trump. “The war in Iran is not our war, but it will come at a cost to the UK. These are not costs I wanted, but they are costs we will have to respond to.”
Speaking before travelling to Washington for the IMF meetings, Reeves blamed Donald Trump for the impact of the war on “families here in the UK but also families in the US and around the world”.
She told the Mirror: “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.
“I feel very frustrated and angry that the US went into this war without a clear exit plan, without a clear idea of what they were trying to achieve.”
IMF global growth chart
As finance ministers and central bank heads from around the globe gather in Washington for the spring meetings of the IMF and the World Bank, the fund said the war had darkened the outlook for global growth.
While warning that countries worldwide would face slower growth and higher inflation, the IMF said net energy importers and developing nations would face the biggest hit.
Highlighting how the fallout is hitting US households as Trump issues conflicting statements about Washington’s aims in the Middle East, the IMF lowered its forecast for US growth in 2026 by 0.1 percentage points, to 2.3%.
However, it reserved its sharpest downgrade for any G7 nation for the UK, cutting its forecast by 0.5 percentage points to 0.8% for this year, while warning that inflation would climb to almost 4% – double the government’s 2% target.
G7 GDP charts
The IMF said the UK economy was particularly exposed to soaring energy prices and entered the Middle East conflict in a weaker position after recording only sluggish growth at the end of 2025.
With the pressure on the global economy mounting, the IMF set out three possible scenarios for the war in its World Economic Outlook (WEO) – in which even a short-lived conflict would dent growth and stoke inflation relative to its previous forecasts made last autumn.
In a central “reference forecast” – based on the assumption that disruption to the world economy from the war fades by mid-2026 – global growth would fall from 3.4% last year to 3.1% in 2026, a downgrade of 0.1 percentage points from the fund’s previous WEO report published last autumn.
However, Pierre-Olivier Gourinchas, the IMF chief economist, warned the continuation of the war meant the world was moving closer to an “adverse scenario” in which oil prices would remain close to $100 this year before falling back to $75 in 2027.
The IMF said under this scenario growth would fall to 2.5% this year and inflation would rise to 5.4%.
“Of course every day that passes, and every day we have more disruption in energy markets, we are drifting more towards the adverse scenario,” Gourinchas said.
Oil prices had jumped back above $100 (£74) a barrel on Monday amid choppy trading in global markets after crunch weekend talks between the US and Iran ended in stalemate and as a US blockade of the strait of Hormuz began. On Tuesday, Brent crude was down 4% at about $95 a barrel on hopes of further peace talks.
The IMF said that under a “severe scenario – with a lengthier, intensive war keeping the oil price above $110 into 2027 – global growth would collapse to about 2% this year, a threshold widely seen as equivalent to a worldwide recession. The IMF estimates global growth has only fallen below this rate four times since 1980, most recently amid the Covid pandemic in 2020 and after the 2008 financial crisis.
In a blow to households, inflation would also exceed 6% – forcing central banks worldwide to drive up interest rates to prevent the shock from allowing fast-rising consumer prices becoming entrenched.
With the threat of an escalating war in the Middle East, the IMF said the best way to limit the economic damage was to bring an end to the conflict. Beyond that, it called on central banks to remain vigilant and urged governments considering using emergency financial support to focus on temporary and targeted measures because most countries had unsustainably high debt levels.
“Untargeted measures – price caps, subsidies, and similar interventions – are popular. But they are frequently poorly designed and costly,” Gourinchas said.
