Iran War Deepens UK Economic Strain, NIESR Warns of Recession Risk

The National Institute of Economic and Social Research (NIESR) estimates the Iran conflict will shave about £35 billion from UK output, cutting growth to 0.9 % in 2026 and 1 % in 2027. Inflation is projected at 4.1 % early 2027, above the Bank of England’s 2 % target until 2028.

NIESR cuts UK growth forecast, warns Iran war will keep inflation above target until 2028ReutersThe IndependentThe GuardianBritain braces for £35bn energy shock as Iran conflict pushes inflation back above 4%

Unemployment may peak at 5.5 % in Q4 2026 and wage growth could fall to 3.3 % in 2027. Brent crude is near $111 per barrel; a $140 price would double the output loss to about £68 billion. Ten-year gilt yields have risen above 5 %, increasing borrowing costs.

Reuters

Chancellor Rachel Reeves said the Treasury will focus on targeted, temporary aid, warning that blanket measures would worsen inflation and fiscal pressure. Prime Minister Keir Starmer cautioned the war will affect shopping habits and urged swift action to keep the Strait of Hormuz open. Governor Andrew Bailey noted limited pricing power among businesses.

The Guardian

Deputy director Stephen Millard warned that expectations of oil falling to $65 per barrel are optimistic, suggesting markets may under-price risk. Vice President JD Vance criticised Labour’s handling of rising energy costs as a burden on middle-class Britons. Helen Dickinson of the British Retail Consortium said Easter discounts have reduced shop-price inflation to 1 % year-on-year, but warned the full impact of the Middle East conflict on consumer prices will arrive soon. NIQ analyst Mike Watkins said accelerating inflation could further depress fragile consumer spending.

Easter discounts cool UK shop prices but Iran war inflation threat looms large

Financial markets price a quarter-point rate rise in July, while NIESR’s baseline calls for a single 25-basis-point increase to 4 % and an adverse scenario envisions multiple hikes to 5.25 %, highlighting uncertainty over the timing and size of policy moves.

NIESR cuts UK growth forecast, warns Iran war will keep inflation above target until 2028

• “David Aikman, the Niesr director, said: “This is a serious blow to the government’s mission to get the UK economy growing again.” — David Aikman, Director, NIESR

The Guardian

• “While people are calling for immediate support, the impacts of the previous government – the untargeted support which cost over £100bn in total – meant that interest rates, inflation and taxes have ended up being higher than they needed to be,” — Rachel Reeves, Chancellor

The Guardian

• “Dickinson made the point plainly, saying the full force of the conflict had yet to hit consumer prices but would do so before long.” — Helen Dickinson, BRC chief executive

Easter discounts cool UK shop prices but Iran war inflation threat looms large

The Bank of England’s Monetary Policy Committee meets on 30 April to set interest rates, and Chancellor Reeves is expected to present the autumn Budget, where primary budget surpluses will be a key focus.

The Guardian