Britain is facing a £35bn economic hit and the risk of a recession this year as the fallout from the Iran war adds pressure on Keir Starmer’s government, according to the National Institute of Economic and Social Research (Niesr). Even under a best-case scenario, the UK economy would grow at a much slower pace in 2026 and 2027 due to the conflict.
Households face rising energy costs linked to the war, and Chancellor Rachel Reeves has said “nothing is off the table” for a targeted support package. However, Niesr warned of a multibillion-pound hole in public finances amid a worsening inflation shock, making it harder for Reeves to respond.
Niesr downgraded its growth forecasts for 2026 by 0.5 percentage points to 0.9%, and for 2027 by 0.3 points to 1%. Under an adverse scenario with oil at $140 a barrel, the UK could face a recession in the second half of this year, with inflation above 5% potentially forcing the Bank of England to raise rates by 1.5% in a single move.
The economic hit could add nearly £24bn to UK government borrowing by the end of the decade, almost erasing Reeves’s fiscal headroom. Niesr deputy director Stephen Millard said the assumption that oil prices have peaked and will fall to $65 per barrel looks increasingly optimistic.
Reeves told MPs on Tuesday that her focus is on targeted support, as blanket measures would be costly and risk stoking inflation further. The yield on 10-year UK government bonds rose above 5% on Tuesday, while the 30-year yield neared its highest since 1998.
