The United Kingdom economy is facing renewed turbulence as the Iran conflict drives a surge in global energy prices, reviving fears of stagflation-like conditions, where inflation stays high while growth weakens.
According to a leading think tank, the National Institute of Economic and Social Research (NIESR), the shock could significantly undermine UK output while tightening financial conditions for households and businesses.
With the current economic threat brought about by the continued fighting in the Middle East, NIESR has revised downwards the country's growth forecast for 2026 by 0.5 percentage points to 0.9%, and by 0.3 percentage points to one percent in 2027, reflecting weaker investment and household spending,The Guardianreported.
NIESR estimates the UK could suffer an approximate £35 billion ($40,970,300,000) loss in output over the next two years as a result of the energy shock linked to the Iran war.
It also warned that the UK mayrisk experiencing a recessionin the second half of 2026 if, under adverse scenarios, the global oil price hits $140 (£119.581) per barrel, which could lead to much higher inflation in the country.
On Tuesday, Brent crude oil was trading at $111 (£94.8104) per barrel.
If this happens, the think tank said UK inflation could rise above five percent, forcing the Bank of England to raise interest rates by 1.5 percentage points.
The International Monetary Fund (IMF) earlier warned that the UK is particularly exposed to the shock, stating: ' ... the war and a slower pace of monetary easing mean that growth is projected to decline from 1.3% in 2025 to 0.8% in 2026, a downward revision of 0.5-percentage-point relative to the October 2025 forecast'.
The IMF also expects inflation to remain above target well into 2027, driven by persistent energy costs and secondary effects in wages and services prices.
This puts policymakers in a tough spot: raising interest rates could lower inflation but slow the economy more, while cutting rates could keep prices rising.
Source: International Business Times UK
