UK Economy Faces £35bn Hit From Iran Conflict as NIESR Warns of Recession Risk
The National Institute of Economic and Social Research has issued a stark warning that the ongoing conflict involving the United States, Israel, and Iran could deliver a £35 billion blow to the UK economy, with oil prices surging above $110 a barrel, inflation threatening to exceed 5%, and the Bank of England facing pressure to raise interest rates at a moment when the economy can least afford it.Background
The Iran conflict, now in its 60th day, has fundamentally altered the global economic landscape. Iran's closure of the Strait of Hormuz — through which approximately 20% of the world's oil and gas passes — has sent energy prices surging and disrupted supply chains across multiple sectors. The conflict began with US and Israeli military action targeting Iran's nuclear facilities and has escalated into a broader regional confrontation, with Hezbollah active in Lebanon and proxy forces engaged across the Middle East.
For the UK, the economic consequences are being felt through multiple channels simultaneously. Higher oil and gas prices feed directly into household energy bills, transport costs, and the price of manufactured goods. The resulting inflation makes it harder for the Bank of England to cut interest rates — which had been falling since August 2024 — and may force it to reverse course entirely. Meanwhile, the geopolitical uncertainty is dampening business investment and consumer confidence at a moment when the economy was already fragile.
The UK entered 2026 with growth of around 1.1%, modest but positive. The EY Item Club had been forecasting a gradual improvement through the year. Those forecasts are now being revised sharply downward, with some economists warning that the UK could "flirt with recession" if the conflict is prolonged and energy prices remain elevated.
Key Developments
NIESR's analysis, published this week, models two scenarios. In the best case — a relatively swift resolution to the conflict — UK growth slows significantly but avoids contraction. In the worst case, with oil prices rising to $140 per barrel and the Strait of Hormuz remaining closed for an extended period, inflation could exceed 5% and the Bank of England would face pressure to raise rates beyond current expectations, with a July increase already being priced in by markets.
Barclays has reduced its UK growth forecast for 2026 to 1%, down from 1.1%, citing tax uncertainty and geopolitical pressures. The bank has also cut its house price growth forecast to 1.9%. Consumer confidence has fallen to a two-year low of -25, according to the latest GfK survey, signalling weakening household spending power. UK government borrowing costs have reached their highest levels since the 2008 financial crisis, with 10-year gilt yields exceeding 5%.
The retail sector is under particular pressure. Claire's has closed all 154 of its standalone stores in the UK and Ireland, resulting in more than 1,300 job losses, citing online competition and weak high street footfall. The hospitality sector is experiencing accelerated closures, with 3.4 pubs and restaurants closing daily in the first quarter of 2026. UK company insolvencies increased by 7% in March to 2,022, with liquidations and administrations both rising.
Economic uncertainty was the most reported challenge affecting turnover for trading businesses in early April 2026, cited by 35% of firms — rising to 40% for businesses with 10 or more employees. This is the highest proportion recorded since April 2022, at the height of the post-pandemic inflation surge.
Why It Matters
The combination of external shock and domestic fragility is particularly dangerous for the UK economy. Unlike the post-pandemic inflation surge, which was a global phenomenon that central banks could address with coordinated rate rises, the current situation involves a geopolitical conflict that monetary policy cannot resolve. Raising interest rates to combat energy-driven inflation risks tipping an already-slowing economy into recession, while holding rates risks allowing inflation expectations to become entrenched.
For context, the UK's fiscal position is already stretched. The House of Lords Economic Affairs Committee has warned about the country's "increasingly fragile fiscal position," with 10-year gilt yields above 5% significantly increasing the cost of servicing the national debt. The government has limited room to deploy fiscal stimulus without breaching its own fiscal rules — a constraint that did not apply to the same degree during the 2020 pandemic response.
Local Impact
For households across the UK and Ireland, the most immediate impact is at the petrol pump and on energy bills. Brent crude above $110 a barrel translates directly into higher fuel costs, which feed through to the price of food, goods, and services. Grocery inflation, which had eased to 3.8% — its lowest in a year — is expected to rise again as transport and production costs increase. For small businesses, particularly in hospitality and retail, the combination of higher energy costs, rising employer National Insurance contributions, and weakening consumer demand is creating a genuinely difficult trading environment. In Northern Ireland, where energy costs are already higher than the GB average due to the island's electricity market structure, the impact is particularly acute.
What's Next
The Bank of England's Monetary Policy Committee announces its interest rate decision on Thursday 30 April. Most economists expect rates to be held at 3.75%, but the vote split will be closely watched for signs of hawkish sentiment. The next inflation data release is scheduled for mid-May and will be critical in shaping the MPC's June decision. Peace negotiations between the US, Israel, and Iran, mediated by Pakistan, remain stalled — with Iran expected to submit a revised proposal after President Trump rejected an earlier version. The outcome of those talks will be the single most important variable for the UK economic outlook over the coming months.
Sources: CPA — UK Business News Today, 29 April 2026; BBC Business — UK economy briefing
