The UK economy faces a £35bn hit and the risk of recession this year due to the impact of the Iran war on energy prices, according to the National Institute of Economic and Social Research (Niesr). The thinktank warned that even in a best-case scenario, growth would slow significantly in 2026 and 2027, adding pressure on the government.
Niesr downgraded its 2026 growth forecast by 0.5 percentage points to 0.9% and the 2027 forecast by 0.3 points to 1%. Under an adverse scenario where oil prices reach $140 a barrel, the UK could face a recession in the second half of 2026, with inflation rising above 5% and potentially forcing the Bank of England to raise interest rates by 1.5%—the largest single increase since Black Wednesday in 1992.
Chancellor Rachel Reeves has stated that “nothing is off the table” regarding targeted and temporary support for households facing higher energy costs. However, Niesr warned that the government faces a multibillion-pound hole in public finances, with the potential to add nearly £24bn to borrowing by the end of the decade, erasing Reeves’s fiscal headroom.
David Aikman, Niesr director, called the situation “a serious blow” to the government’s growth mission, highlighting the UK’s exposure to global energy shocks. Niesr deputy director Stephen Millard cautioned that market expectations of oil prices falling to $65 per barrel appear increasingly optimistic. The yield on 10-year UK government bonds rose above 5%, while 30-year yields neared levels not seen since 1998.
