The International Monetary Fund has raised its growth forecast for the UK, offering a rare bright spot for the incoming prime minister, Andy Burnham, amid the turmoil of the Iran war. In its July update of the World Economic Outlook, finalised before the latest outbreak of hostilities in the Middle East, the Washington-based organisation projected UK gross domestic product would grow by 1% this year – up 0.2 percentage points from its April forecast. That makes Britain the third fastest-growing economy in the G7, behind the US, whose 2.3% growth has been boosted by the AI investment boom, and oil-exporting Canada at 1.1%.
The modest upgrade is the latest sign that the economy may be less battered by the conflict than previously feared. At the height of the Iran war, it was thought the Bank of England might need to raise interest rates several times in succession to combat soaring prices. Now, with inflation unexpectedly unchanged in May, financial markets are pricing in just one rate rise by next spring. The IMF expects inflation to fall back to the government’s 2% target by the middle of 2027, and its growth forecast for next year remains unchanged at 1.3%.
“IMF upgrades UK 2026 growth forecast to 1%, making it third fastest in G7, as Iran war fears ease.”
Global oil prices have fallen sharply since the announcement of a memorandum of understanding between the US and Iran last month, as emergency stockpiles were drawn down to cushion the shock. But prices surged again on Wednesday after Donald Trump described the ceasefire as “over”, injecting fresh uncertainty. “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 AI and its adoption,” the IMF said.
The fund’s forecast for global economic growth is broadly unchanged from April, at 3% this year and 3.4% next – down from an average of 3.5% over the previous two years. While the AI boom has helped cushion the impact of costlier energy, some countries have been hit much harder than others. For Burnham, inheriting an economy that is outperforming most of its G7 peers – even if only modestly – may provide a sliver of room for manoeuvre as he navigates the fallout from a conflict that refuses to stay contained.