Households across the UK are facing a more severe cost of living increase over the next two years due to the recent conflict in Iran, according to a prominent organization. The International Monetary Fund has downgraded its projections for UK economic growth, dealing a significant setback to Chancellor Rachel Reeves and the Labour Party’s efforts to jumpstart the economy.
The IMF outlined the serious repercussions of the Middle East conflict, cautioning that a global recession could be imminent in a worst-case scenario. Following the attacks on Iran by the US and Israel in late February, the IMF revised its growth forecasts for the UK downward from 1.3% to 0.8% for this year, and from 1.5% to 1.3% for next year. Additionally, inflation is now expected to average 3.2% this year and 2.4% next year, exacerbating financial hardships for families.
The ongoing economic challenges coincide with a surge in fuel prices, alongside predictions of higher energy and food expenses. Furthermore, the IMF anticipates a rise in unemployment to 5.6% in 2026, up from 4.9% in the previous year. The escalation in oil and gas prices is attributed to disruptions in energy production and transportation caused by attacks on key facilities and the blockade of the Strait of Hormuz.
Key political figures, including Chancellor Rachel Reeves and the Bank of England’s Andrew Bailey, are attending the latest IMF annual meeting in Washington. The IMF’s economic outlook underscores the threat to the global economy posed by the outbreak of war, with IMF officials expressing concerns about a potential energy crisis on a significant scale.
The IMF warned that in a severe scenario, global growth could be reduced by 1.3 percentage points in 2026 due to the conflict. This could potentially lead to a global recession, a situation that has only occurred a few times since 1980, notably during the global financial crisis and the Covid-19 pandemic.
Simon Pittaway, a senior economist at the Resolution Foundation, highlighted the vulnerability of British households to the economic fallout from the Middle East conflict. With inflation rates and interest levels already high compared to other G7 nations, UK households are expected to bear the brunt of escalating inflation over the next two years. Pittaway emphasized the need for cautious and targeted government support to shield vulnerable households without exacerbating inflation or straining public finances.