Back to Headlines
Economy
Apr 29, 2026
Analyzed by Llama- 4 Scout 17B 16E Instruct

UK Faces £35bn Economic Hit and Risk of Recession Due to Iran War

AI Summary
The UK is facing a £35bn economic hit and the risk of recession this year due to the impact of the Iran war, according to a leading thinktank. The National Institute of Economic and Social Research (Niesr) warned that even under a best-case scenario, the UK economy would grow at a much slower pace this year and next.

The Economic Impact of the Iran War

Britain is facing a £35bn economic hit and the risk of a recession this year as the fallout from the Iran war adds to the pressure on Keir Starmer’s government, a leading thinktank has warned.

Niesr's Economic Forecast

The National Institute of Economic and Social Research (Niesr) said that even under a best-case scenario the UK economy would grow at a much slower pace this year and next because of the Middle East conflict.

  • Niesr downgraded its previous growth forecasts for 2026 by 0.5 percentage points, to 0.9%, and by 0.3 percentage points in 2027, to 1%.
  • Under an adverse scenario, involving the global oil price hitting $140 a barrel, Britain would face a much bigger inflation shock than currently anticipated, which would risk plunging the economy into a recession in the second half of this year.

The Government's Response

With households facing a rise in energy costs linked to the Iran war, the chancellor, Rachel Reeves, has said that “nothing is off the table” as the government considers options to provide a targeted and temporary support package.

The Data Analysis

The economic hit from the Iran war has the potential to add almost £24bn to UK government borrowing by the end of the decade. This would almost entirely erase Rachel Reeves’s headroom against her self-imposed fiscal rules.

The Impact Analysis

The Middle East conflict has laid bare the fact that the UK remains highly exposed to global energy shocks. Even if hostilities ease rapidly, higher energy prices will leave households poorer, businesses facing higher costs, and the economy materially smaller than expected only a few months ago.

The Prediction

Financial markets widely expect the Bank of England to keep interest rates unchanged on Thursday. However, Niesr expects the Bank to raise interest rates by a quarter point in July to 4%, although it cautioned that a rise in borrowing costs from Threadneedle Street at its next policy meeting on Thursday could not be ruled out.