The energy crisis triggered by the Iran war could wipe £35bn off the UK economy, even in the best-case scenario, according to the National Institute of Economic and Social Research (Niesr). The think tank's bleak projections warn that a prolonged conflict could plunge the UK into recession during the second half of this year.
Niesr director David Aikman described the forecasts as a 'serious blow to the government’s mission to get the UK economy growing again'. He noted that the crisis has exposed the UK's vulnerability to global energy shocks, leaving households poorer and businesses facing higher costs.
Even in the most optimistic scenario, assuming a resolution this year, Niesr forecasts economic growth slowing to 0.9% this year and 1% next year, down from 1.4% last year. Previously, the think tank had predicted 1.4% growth this year and 1.3% in 2027. Inflation, which rose to 3.3% last month, is expected to peak at 4.1% in January before returning to the Bank of England's 2% target by 2028.
The Bank of England is expected to raise interest rates from 3.75% to 4% in July, with potential further increases to 5.25% if inflationary pressures persist. Growth in disposable income is forecast to slow to 1% next year and 0.6% the year after.
Prime Minister Sir Keir Starmer warned that people may need to change shopping habits and holiday plans due to the economic impact, but urged against panic. He stated that the government is working to reopen the Strait of Hormuz, though the damage will persist beyond that. The PM noted that airlines have sufficient jet fuel and a CO2 plant has been reopened in the North East.
