Rachel Reeves must fear that her efforts to bring stability to the British economy are doomed to failure. Events beyond her control have a nasty habit of interfering with even the best laid plans.

When the Chancellor lands in Washington DC on Tuesday for the spring gathering of the great and the good of the global economy, she will be confronted by a downgrade for UK growth and the prospect of surging inflation.

She will also face a demand by the International Monetary Fund (IMF) that the UK resist political calls for spending increases or tax cuts to mitigate higher energy costs sparked by the Iran conflict.

Reeves, who once served as a lowly second economic secretary at Britain’s embassy in the US, clearly relishes her status as Chancellor and the prospect of being back in the American capital.

But she is plagued by the mercurial behaviour of Donald Trump’s White House, among other things. A year ago, she was confronted by tariff mayhem (and was shadowed throughout the meetings by the now disgraced figure of then ambassador Peter Mandelson).

At the annual meeting of the IMF and World Bank in October last year Reeves and the world were fearful of an artificial intelligence bubble and the risk that private credit markets were on the verge of crashing – a risk yet to dissipate.

The Chancellor’s decision to hold a late November Budget in 2025 cast a huge, confidence-sapping cloud of uncertainty over business, consumers, and the prospects for Britain’s recovery.

But as serious as these shocks have been, none are as potentially catastrophic as the fallout from the US-Israeli assault on Iran, which has all but closed the Strait of Hormuz to Western shipping. The current ceasefire may provide temporary relief to financial markets but the scale of damage to the global economy is terrifying.

Research by the IMF shows wars lead to longer-lasting damage than financial shocks, such as those in sovereign debt, banking or currency markets. And the after-effects are felt well beyond nations directly affected by conflict.

Much of the world is still suffering the effects of the ongoing war in Ukraine. In Britain it has meant higher energy prices than would have otherwise been the case, above-target inflation at 3 per cent and stubbornly high interest rates even before the Iran conflagration. 

It is against this backdrop that Reeves will hold a series of bilateral meetings with fellow finance ministers to try to hash out a coherent response. 

She is also due at a session of G7 ministers from the world’s richest nations as well as a meeting of the IMF’s main steering committee, while making US media appearances too.

Investors moving into cash 

Away from Iran, other nasties are lurking that could cause more pain for the Chancellor. 

Governor of the Bank of England Andrew Bailey, who will also be in Washington this week, recently cautioned that the aftershocks of the war could have an impact on the £2.6 trillion private credit market, an opaque part of the global financial system that has recently suffered a spate of sudden collapses.

Ahead of the IMF meeting, private equity powerhouse Carlyle reported a run on funds from its £5.2 billion Tactical Private Credit Fund with investors cashing out 16 per cent of their holdings in the first three months of this year.

A senior wealth manager at one of Britain’s High Street banks also told me that investors, fearful of overheating in credit markets and the effect of the Middle East war, are rapidly moving into cash.

Even the IMF’s usually circumspect managing director Kristalina Georgieva warned in a pre-spring meeting address that ‘a resilient world economy is being tested by the now-paused war in the Middle East’.

Her concerns are not to be disregarded as, while the fragile ceasefire appears to be holding for now, the ripples from the conflict, including oil refinery shutdowns and the blocking of key chemicals such as fertiliser ingredients threatens to cause fuel shortages and imperil the food supply of 45 million people across the globe.

Georgieva also fears the conflict has triggered a rise in inflationary expectations that could ‘break an anchor and ignite a costly inflation process’ that would see consumers faced with yet higher prices.

The UK, with its dependence on ‘just in time’ liquefied natural gas supplies, is particularly vulnerable to imported inflation, which is likely to keep the Bank of England’s interest rate, currently at 3.75 per cent, higher for longer, increasing the cost of servicing the UK’s borrowing which is running at about £110 billion a year.

But the IMF is warning advanced economies against trying to alleviate the suffering of citizens by giving out cost subsidies, saying such moves could trigger a sell-off in government bonds and push up borrowing costs even more.

It comes as the fund draws up plans to dole out as much as £45 billion to struggling member states, a figure that may not hold if the Iran conflict erupts again. While Georgieva is confident it has the resources to weather the latest upheaval, it may raise questions as to whether the IMF will soon be dealt one shock too many.