The UK economy is expected to suffer a significant setback as the ongoing conflict involving Iran disrupts global energy markets. A leading economic institute has warned that even under relatively stable conditions, the financial impact will be substantial. The situation reflects broader vulnerabilities in the UK’s exposure to external energy shocks. Rising costs are already feeding into inflation and growth forecasts, raising concerns about the country’s economic trajectory in the coming years.
Slower Growth and Rising Inflation Reshape Outlook
According to the National Institute of Economic and Social Research (NIESR), the UK economy could be £35bn smaller than previously expected by 2026 and 2027, even if the conflict eases within the year. The institute has downgraded its growth forecast for 2026 to 0.9 per cent and to 1 per cent in 2027, compared with earlier projections of stronger expansion.
The shift reflects the impact of higher energy prices filtering through households and businesses. NIESR director David Aikman stated that the crisis has exposed how reliant the UK remains on global energy markets, adding that households will be left poorer while firms face increased costs. According to reports, he described the situation as a “serious blow” to the government’s economic ambitions.
Inflation, which recently stood at 3.3 per cent, is expected to fluctuate further. According to NIESR projections cited by multiple outlets, it could fall briefly before rising again to peak at 4.1 per cent early next year. The Bank of England’s 2 per cent target is not expected to be reached until 2028, prolonging pressure on living standards.
Interest rates are also expected to respond. NIESR anticipates an increase from the current 3.75 per cent to around 4 per cent in the near term, with the possibility of higher rises if inflation persists. According to The Guardian, a more severe scenario could push inflation above 5 per cent, potentially requiring sharper monetary tightening.
Recession Risks and Pressure on Public Finances
Beyond slower growth, the prospect of a recession has become more prominent. NIESR has warned that a prolonged escalation in the Middle East could push the UK economy into recession in the second half of the year. This risk is tied to sustained increases in oil prices and broader financial instability.
According to The Guardian, the institute described a scenario in which oil prices reach $140 a barrel as “severe but plausible”, highlighting the scale of uncertainty facing policymakers. In such conditions, borrowing costs could rise further, complicating efforts to stabilise the economy.
The impact extends to government finances. The same analysis suggests that the economic shock could add nearly £24bn to public borrowing by the end of the decade. This would significantly reduce the fiscal flexibility available to the government, particularly as it considers targeted support measures for households affected by rising costs.
Chancellor Rachel Reeves has indicated that interventions remain under consideration, though she has cautioned against broad spending measures that could worsen inflation. She emphasised the need for targeted responses, noting the long-term effects of previous large-scale support programmes.
The combined pressures of weaker growth, higher inflation, and constrained public finances illustrate the scale of the challenge. While energy markets remain volatile, the UK’s economic outlook continues to depend heavily on developments beyond its control.
