Its latest World Economic Outlook report, Global Economy in the Shadow of War, said this was a downward revision of 0.5 percentage points and attributed this to the war and the slower pace of monetary easing in the UK.
Growth would then recover to 1.3% in 2027, 0.2% percentage points lower than expected before the conflict and as a result of higher energy prices.
It predicted that inflation would rise again temporarily toward 4% before returning to the 2% target at the end of 2027, as the impact of higher energy costs eases and the weaker labour market puts downward pressure on wage growth.
The IMF said if the conflict remains limited in duration and scope, global growth will slow from 3.1% this year and 3.2% in 2027.
It said the overall impact on global growth in advanced economies was “modest”, with just a 0.2% percentage point reduction compared to the pre-conflict forecast.
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However, a large negative effect is expected in some net energy-importing economies, such as the euro area and the UK.
Less chance for a base rate cut
Lindsay James, investment strategist at Quilter, said the conflict in the Middle East had “effectively blown a hole open” in the government’s economic plan.
James said: “With interest rate cuts now firmly off the cards for now, and the potential for hikes very much live, economic growth is going to be hard to come by.
“It is hoped that much of this economic shock will be short-lived, provided the conflict does not drag on. The IMF expects the UK to recover to become the fastest growing G7 European economy in 2027 with growth of 1.3%, but with inflation also expected to be the highest amongst peers, there remains risk that further revisions could be made.”
She added: “Even with any resolution, things are unlikely to go back to normal and we should now have to get familiar with elevated oil and gas prices for the foreseeable future.”
Susannah Streeter, chief investment strategist at Wealth Club, said: “1-2 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.”
Streeter said the UK was stuck in a “stagflation scenario and risks of a recession are rising fast”.
The Bank of England Monetary Policy Committee’s (MPC’s) next meeting will be held on 30 April.
