The International Monetary Fund has upgraded its growth forecast for the United Kingdom while leaving projections for other G7 nations unchanged or weaker, signalling that the economic fallout from the Iran conflict may be less damaging than initially anticipated.
UK GDP Projection Raised to 1%
In a July update of its World Economic Outlook, finalised before the latest outbreak of hostilities in the Middle East, the Washington-based organisation projected UK gross domestic product to grow by 1% this year. This represents an increase of 0.2 percentage points from its April forecast.
The revised figure places the UK as the third fastest-growing economy in the G7 for 2026, trailing only the United States, whose 2.3% growth rate has been boosted by the artificial intelligence investment boom, and oil-exporting Canada at 1.1%.
Positive Signs for Incoming Prime Minister
The modest upgrade offers a hint that incoming prime minister Andy Burnham may inherit an economy less battered by the Middle East conflict than previously feared. The IMF's growth forecast for the UK next year remains unchanged at 1.3%, as inflation is expected to fall back towards the government's 2% target by mid-2027.
Official data showed UK inflation unexpectedly remained unchanged in May, with financial markets pricing in just one interest rate rise by next spring. At the height of the conflict, it was feared Bank of England policymakers might resort to several successive increases to tackle soaring prices, with knock-on effects for consumers and businesses.
Global Oil Prices and Ceasefire Uncertainty
Global oil prices have fallen sharply since the announcement of a memorandum of understanding between the US and Iran last month. However, prices surged on Wednesday amid fresh uncertainty about peace prospects after Donald Trump described the ceasefire as "over".
The IMF's forecast for global economic growth is broadly unchanged since April, at 3% this year and 3.4% next, down from an average of 3.5% over the previous two years. The organisation explained that the AI boom has helped cushion the impact of costlier energy resulting from the war, though some countries have been hit much harder than others.
"The modest slowdown reflects the effects of the war in the Middle East being partly offset by accelerated demand-driven momentum in the global technology cycle, thanks to advances in artificial intelligence and its adoption," the IMF said.
Divergent Energy Price Impacts
Oil prices have risen less dramatically than some analysts feared due to the drawdown of emergency stockpiles. The IMF noted that the price of fossil fuels for consumers has varied significantly according to geographical location. Retail gasoline prices have risen by 30% in Asia but only 15% in Latin America, while liquefied natural gas prices are up 50% in Asia and 25% in Europe.
The countries whose economies have been worst hit are energy importers that have played little part in global technology supply chains. The IMF also warned that the full effects of the crisis, which has affected fertiliser prices as well as fuel costs, have yet to be felt, and risks remain to the downside.
Risks of Renewed Conflict
The IMF singled out the danger of a resumption of hostilities, warning that "renewed conflict would propagate through a further increase in commodity prices and extended volatility, supply shortages, and exchange rate pressures." Another threat highlighted is what it calls "a possible correction in technology-driven expectations" that would hit financial markets and impair global trade.
"In such a scenario, investment in technology-intensive sectors could retrench abruptly, and frothy equity valuations – particularly in AI-exporting economies and markets with high concentration in technology firms – could correct sharply," the IMF said.
Political Implications for Burnham
Burnham, who is expected to take office on 17 July unless a last-minute challenger emerges, has not yet announced his chancellor but will face early questions about tax and spending plans ahead of an autumn budget. Responding to the IMF report, a spokesperson said: "Our choices mean the economy is in a better position to deal with the costs of the war in Iran while kickstarting long-term growth by focusing on our three big choices – boosting AI, regional growth and strengthening trade with the EU."
