NIESR Says Iran Conflict Could Drain £35bn and Push UK Into Recession

Context Britain’s economy is already strained by high inflation and rising energy bills. The outbreak of hostilities in Iran has added a new shock, pushing energy prices higher and threatening household budgets. Chancellor Rachel Reeves has signalled that targeted, temporary aid may be required, but fiscal space is tightening.

Key Facts - NIESR estimates a £35 billion hit to UK output this year and warns that the economy could slip into recession in the second half of 2024. - Director David Aikman called the conflict “a serious blow” to the government’s growth agenda, noting the UK’s exposure to global energy shocks. - The institute trimmed its 2026 growth forecast by 0.5 percentage points to 0.9% and its 2027 outlook by 0.3 points to 1.0%. - Under a worst‑case scenario where Brent crude reaches $140 a barrel, inflation could breach 5%, forcing the Bank of England to consider a 1.5% rate hike – the largest single move since 1992. - Even in a baseline case with gradually falling oil prices, the Bank is expected to raise rates by a quarter point to 4% in July. - NIESR projects the war could add almost £24 billion to public borrowing by 2030, eroding the fiscal headroom the chancellor has set for herself.

What It Means The projected £35 billion loss translates into lower wages, higher living costs and reduced business investment. Households already coping with higher energy bills may see disposable income shrink further, while firms face higher input costs. The fiscal impact limits the government’s ability to deliver broad‑based stimulus, pushing policy toward narrowly targeted support.

If oil prices stay elevated, inflation could rise above the 5% threshold, prompting a steep interest‑rate increase. Higher rates would raise borrowing costs for households and firms, potentially deepening the slowdown. Conversely, a rapid de‑escalation in the Middle East could temper energy prices, but NIESR warns that even a quick ceasefire would leave the economy smaller than expected only months ago.

Policymakers now face a tightrope: balance the need for immediate relief against the risk of fuelling inflation and widening the public‑finance gap. The next Bank of England meeting and the upcoming local elections will test how far the government is willing to go.

What to watch next: oil price movements, the Bank of England’s July rate decision, and any fiscal package announced by the Treasury in response to the energy shock.