The energy crisis triggered by the Iran war could wipe £35bn off the UK economy – even in the best-case scenario, a leading think tank has warned.
But a prolonged conflict in the region could plunge the UK into recession during the second half of this year, the National Institute of Economic and Social Research (Niesr) said in bleak new projections.
The organisation’s director David Aikman said the forecasts were a “serious blow to the government’s mission to get the UK economy growing again”.
He said the crisis in the Middle East had “laid bare the fact that the UK remains highly exposed to global energy shocks. Even if hostilities ease rapidly, higher energy prices will leave households poorer, businesses facing higher costs, and the economy materially smaller than we expected only a few months ago”.
Already the US-Israeli conflict with Iran has led to warnings of slower growth and higher inflation for the UK, with the Bank of England expected to raise interest rates, currently at 3.75 per cent, this summer.
Niesr predicts a rise to 4 per cent in July but warns, after that, if there are persistent inflationary pressures from the conflict, they could climb as high as 5.25 per cent.
Even in its most optimistic scenario, which assumes a resolution in the war this year, the organisation still forecasts a slowdown in economic growth to 0.9 per cent this year and 1 per cent next year, down from 1.4 per cent last year.
Previously, Niesr had predicted 1.4 per cent growth this year and 1.3 per cent in 2027.
Even with a swift end to the conflict, Niesr said the UK economy will be around £35bn smaller in 2026 and 2027, casting uncertainty over Labour’s ambitions to grow the UK economy.
The forecasts also suggest inflation, which rose to 3.3 per cent last month, will slow to 2.5 per cent and then shoot up alongside higher energy prices, peaking at 4.1 per cent in January.
It will not drop back to the Bank of England’s 2 per cent target rate until 2028, Niesr said.
Meanwhile, growth in disposable income is forecast to slow to 1 per cent next year and 0.6 per cent the year after.
Earlier this week, the prime minister warned that people might have to change their shopping habits and holiday plans as a result of the economic impact of the conflict in Iran, but urged the public not to panic.
Sir Keir told the Cathy Newman Show on Sky News: “There is going to be an impact on the UK. There already is.
“And I think it’s really important that I level with the public that we are doing everything we can to get the Strait of Hormuz open, because obviously that is vital in terms of minimising the impact.
“But I don’t want anybody to think that, once the strait is open, that’s the end of the damage. It will go on longer than that.”
“At the moment, we’re confident about supply. We have reopened a CO2 plant in the North East. Airlines are telling us that they’ve got enough jet fuel at the moment.”
But he added, “We’ll see how long the conflict goes on.”
He said: “I can see that, if there’s more impact, people might change their habits… where they go on holiday this year, what they’re buying in the supermarket, that sort of thing.”
Earlier this month, US vice president JD Vance criticised Labour and claimed “middle-class Brits” can’t afford to get to work because of soaring energy costs – while failing to acknowledge that the price hikes have been driven by Donald Trump’s war in Iran.
