The UK is facing one of the largest shocks from the conflict in the Middle East, the International Monetary Fund (IMF) has warned, saying Britain’s economy is “especially exposed” to spiralling prices because of its reliance on gas‑fired power.
Comparing the impact of rising prices to a “large sudden tax on income” for a family, the IMF warned that the “de facto closure of the Strait of Hormuz and damage to regional infrastructure have produced the largest disruption to the global oil market in its history”.
The IMF, which advises on policy and gives financial aid to member countries, said it was stepping up support, especially to the most vulnerable economies.
Writing in a blog post on Monday, it explained that the war’s impact is “both global and highly uneven”, with some countries likely to face a renewed cost of living squeeze.
Large energy importers in Asia and Europe are bearing the brunt of higher fuel prices and input costs due to the effective closure of the Strait of Hormuz, a key shipping lane, which has caused shipments of oil and gas to grind to a halt.
Countries such as the UK and Italy have been particularly exposed, while France and Spain were relatively protected by their greater use of nuclear and renewable energy sources, according to the IMF.
The organisation also warned of mounting concerns about food prices shooting up because of the disruption to shipments of fertiliser from the Middle East.
“The interruption of crop-nutrient supplies from the Gulf comes just as planting season begins in the Northern Hemisphere, threatening yields and harvests through the year and pushing food prices higher,” it said.
The most vulnerable countries will “bear the heaviest burden”, with people in low-income countries spending a bigger proportion of their incomes on food.
“Although the war could shape the global economy in different ways, all roads lead to higher prices and slower growth,” the IMF warned.
The ultimate impact depends on how long the war lasts and how much damage it does to infrastructure and supply chains, but the world may “settle somewhere in between – tensions linger, energy stays costly, and inflation proves hard to tame”, it wrote.
The warnings come after Sir Keir Starmer told business and military chiefs in a Downing Street meeting on Monday that his priority was ending the Middle East conflict and working on a “viable plan” to reopen the Strait of Hormuz.
Downing Street said the aim of the meeting, which included representatives from energy firms Shell and BP, the shipping giant Maersk, maritime insurance specialist Lloyd’s of London and the HSBC and Goldman Sachs banks, was to discuss how the government and private sector can work together in responding to the situation.
Sir Keir told bosses that it must be a “joint effort” to tackle the impact of the war, adding: “The government can’t do it on its own. You can’t do it on your own. We’re going to have to work together on this.”
There is expected to be a Cobra meeting on Tuesday, at which senior ministers will discuss the ongoing economic hit caused by the war.
Meanwhile, Rachel Reeves faces growing pressure to follow European countries and take action to protect consumers from rapidly rising fuel prices.
Oil prices, which have a significant effect on the wholesale cost of fuel, have soared in response to Iran’s stranglehold on tankers passing through the Strait of Hormuz, pushing up pump prices and piling pressure on the government to abandon a planned increase in fuel duty due in September.
The chancellor announced in the November budget that the fuel duty reduction – introduced by the Conservative government in March 2022 after the outbreak of the Ukraine war – would be extended until the end of August 2026, with rates then gradually returning to previous levels over the next five years.
But she now faces mounting calls to abandon the increase in fuel duty planned for September and instead follow European allies who have taken significant steps to keep prices down as the war continues.
