Middle East energy crisis could wipe £35bn off UK economy – even in best-case scenario, think tank warns
The energy crisis triggered by the Iran war could wipe £35bn from the UK economy even in a best-case scenario, a leading think tank has warned.
But a prolonged conflict in the region could plunge Britain into recession in the second half of this year, the National Institute for Economic and Social Research (Niesr) said in bleak new forecasts.
The organisation’s director, David Aikman, said the forecasts were a “serious blow to the government’s mission to re-grow the UK economy”.
He said the crisis in the Middle East “makes clear the fact that the UK is highly vulnerable to global energy shocks”. “Even if hostilities ease quickly, higher energy prices will leave households poorer, businesses facing higher costs and the economy materially smaller than we expected just a few months ago.”
The US-Israeli conflict with Iran has led to warnings of slower growth and higher inflation for the UK; The Bank of England is expected to increase interest rates this summer, currently at 3.75 per cent.
Niesr predicts an increase of up to 4 percent in July, but warns that the rate could rise to as high as 5.25 percent after that if there are persistent inflationary pressures from the conflict.
Even in its most optimistic scenario, which assumes the war will be resolved this year, the organization predicts a slowdown in economic growth from 1.4 percent last year to 0.9 percent this year and 1 percent next year.
Niesr had previously predicted growth of 1.4 percent this year and 1.3 percent in 2027.
Despite a quick end to the conflict, Niesr said the UK economy would be around £35 billion smaller in 2026 and 2027, creating uncertainty over Labour’s ambition to grow the UK economy.
Forecasts also suggest that inflation, which rose to 3.3 percent last month, will first slow to 2.5 percent and then rise with higher energy prices, reaching 4.1 percent in January.
Niesr said interest rates would not return to the Bank of England’s target rate of 2 percent until 2028.
Meanwhile, growth in disposable income is expected to slow to 1 percent next year and 0.6 percent the year after.
Earlier this week, the prime minister warned people may have to change their shopping habits and holiday plans due to the economic impact of the conflict in Iran, but urged the public not to panic.
Sir Keir said: The Cathy Newman Show On Sky News: “It will have an impact on the UK, it already has.
“I think it’s really important for me to inform the public that we’re doing everything we can to open the Strait of Hormuz, because obviously that’s vital to minimizing the impact.
“But I don’t want anyone to think that once the throat is opened, the damage will stop, and that it will last even longer.”
“We are confident about supply at the moment. We have reopened a CO2 plant in the North East. Airlines are telling us there is sufficient jet fuel available now.”
But he added: “We will see how long the conflict lasts.”
He said: “I see that if there is more impact, people may change their habits… things like where they will go on holiday this year, what they will buy in the supermarket.”
Earlier this month US vice-president JD Vance criticized Labor and claimed “middle-class Brits” were unable to go to work due to rising energy costs; However, he did not accept that the price increases were due to Donald Trump’s war in Iran.
