The IMF has cut the UK’s growth prospects for 2026 by more than any other G7 nation as it warned that the UK faces a heavy blow from the ongoing energy crisis.
The UK’s GDP will expand 0.8% this year, 0.5 percentage points below the IMF’s previous forecast in January, according to its latest World Economic Outlook.
The IMF said unemployment in the UK will now will head towards its highest level in over 10 years.
The IMF linked its weaker outlook for the UK to the U.S.-Israeli war with Iran and on the likelihood of slower UK central bank interest rate cuts due to the energy price crisis.
Sam Alvis, associate director at the Institute for Public Policy Research, said the lower outlook underlined how the UK remained at the mercy of global crises.
“Our dependence on volatile fossil fuels leaves households and businesses exposed to yet another wave of energy price shocks,” Alvis said.
“We will need to protect people from the effects of this now but to stop us having to do so again in the future we need to invest in electrification and clean, homegrown energy.”
IMF Chief Economist Pierre-Olivier Gourinchas said UK finance minister Rachel Reeves faces a “delicate” exercise in balancing support policies with the strain on the UK’s public finances.
Susannah Streeter, chief investment strategist of the Wealth Club, said: “The IMF 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.
“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.
“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. 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.”