IMF cuts UK, Germany growth forecasts on energy shock from Iran conflict

The International Monetary Fund has sharply downgraded economic growth forecasts for both the United Kingdom and Germany, citing the inflationary fallout from the Iran conflict.

Britain recorded the steepest downgrade among major advanced economies.

The IMF now expects the UK economy to grow by 0.8% in 2026, down from its earlier projection of 1.3%.

UK faces sharpest downgrade in G7

This marks the largest downgrade among Group of Seven economies. Britain is now forecast to grow at the same pace as Germany and slightly below France.

On a per capita basis, it ranks at the bottom of the G7.

The IMF attributed the downgrade to Britain’s exposure to surging natural gas prices following the US-Israeli war with Iran.

The conflict initially doubled gas prices, significantly impacting the UK economy, which relies heavily on energy imports.

The Fund also highlighted slower interest rate cuts by the Bank of England as another factor weighing on growth.

UK finance minister Rachel Reeves criticised the United States’ handling of the conflict.

Speaking to Britain’s Mirror newspaper, she said she was "very frustrated and angry" over what she described as the lack of a clear exit strategy.

"That is a folly, and it is one that is affecting families here in the UK but also families in the US and around the world," she said.

The economic impact threatens commitments made by Prime Minister Keir Starmer and Reeves to accelerate growth and improve living standards.

Rising unemployment and inflation pressures

The IMF expects Britain’s unemployment rate to rise to 5.6% this year, up from 4.9% in 2025.

Inflation is projected to peak at around 4% and average 3.2% in 2026.

It is expected to return to the Bank of England’s 2% target only by the end of 2027.

This compares with earlier forecasts of 2.5% inflation for 2026.

The opposition Conservative Party blamed the downgrade on government decisions, including increased taxes on employers.

Germany's outlook also weakened

Germany also saw significant downward revisions.

The IMF now forecasts growth of 0.8% in 2026 and 1.2% in 2027, both reduced by 0.3 percentage points.

For the euro area, growth is projected at 1.1% in 2026 and 1.2% in 2027, both trimmed by 0.2 percentage points, according to Reuters.

Germany’s economy has struggled to recover momentum since the COVID-19 pandemic. Rising competition from China and persistently high energy costs have further weakened its export-driven model.

Inflation rises as energy prices surge

The Iran conflict has emerged as a major global economic shock.

A spike in oil and gas prices following US-Israeli strikes on February 28 pushed German inflation to 2.8% in March.

The IMF expects Germany’s inflation to rise to 2.7% this year, up from 2.3% last year.

In response, Germany’s coalition government has announced fuel price relief worth 1.6 billion euros through cuts to diesel and petrol levies.

The IMF cautioned governments against broad fuel subsidies, stating they are costly and difficult to reverse. Instead, it recommended temporary and targeted support for vulnerable households.

IMF Chief Economist Pierre-Olivier Gourinchas warned that policymakers face a delicate balancing act.

"When you look at volatility in the gilt markets, it's very, very clear the market is very sensitive to fiscal news in the UK," he told Reuters.

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