Source: Sharecast
In its latest World Economic Outlook, the IMF said it now expects the UK economy to grow by 0.8% this year, down from a previous projection for 1.3% growth. The downgrade was put down in part to the war in the Middle East and a slower pace of monetary easing.
The IMF said growth is projected to recover to 1.3% in 2027, slower than expected before the war as the impact of higher energy prices lingers. It had previously expected the UK economy to grow 1.5% next year.
Meanwhile, the fund cut its projection for global growth to 3.1% from 3.3% in January.
"Once again, the global economy is threatened with being thrown off course - this time by the outbreak of war in the Middle East at the end of February 2026," it said. "Over the past year, headwinds from higher trade barriers and elevated uncertainty have been offset by tailwinds from technology-related investment; accommodative financial conditions, including a weaker US dollar; and fiscal and monetary policy support.
"The Middle East conflict presents a significant counterforce to these tailwinds through its impact on commodity markets, inflation expectations, and financial conditions."
Susannah Streeter, chief investment strategist at Wealth Club, said the UK downgrade is a fresh blow to Chancellor Rachel Reeves and the government's "elusive" search for growth.
"The UK is set to be battered by hot oil prices, an energy bill crisis and a tightening of consumer spending," she said.
"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."
Streeter said 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," she said.
"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."