Britain could face a £35 billion economic hit this year as the fallout from the Iran war puts fresh pressure on the UK economy, according to the National Institute of Economic and Social Research (NIESR).
The think tank warned that even its best-case scenario points to weaker growth in 2026 and 2027, with higher energy costs weighing on households and businesses. It has cut its UK growth forecast for 2026 by 0.5% to 0.9%, and its 2027 forecast by 0.3% to 1%.
NIESR said a more severe, but still plausible, scenario could push Brent crude oil to $140 a barrel. That would risk inflation rising above 5% and could tip the UK into recession in the second half of the year.
Such an inflation shock would also limit the Government’s room for manoeuvre. Chancellor Rachel Reeves has said “nothing is off the table” as ministers consider targeted, temporary support for households facing higher energy bills. However, NIESR said the conflict could add almost £24bn to Government borrowing by the end of the decade, almost wiping out Reeves’s fiscal headroom.
The pressure comes as UK borrowing costs rise, with 10-year gilt yields climbing above 5% and 30-year yields nearing levels last seen in the late 1990s.
NIESR also expects the Bank of England to raise interest rates by 0.25% in July to 4%, although financial markets largely expect rates to be held this week.
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