UK Faces Recession Risk as Iran War Threatens Growth and Inflation

A NIESR report warns the UK faces heightened recession risk from the Iran war as higher oil prices and energy costs weaken growth, lift inflation and squeeze fiscal space. NIESR cut its 2026 GDP forecast to 0.9% (from 1.4%) and estimates at least a 0.5 percentage-point hit this year; GDP is projected to barely grow (~1%) in 2027. Inflation is expected to exceed 4% by early next year, prompting the Bank of England to consider rate hikes as soon as July; in a severe $140/barrel oil scenario the MPC could raise rates by ~150bps, leaving inflation above 5% into 2027. The shock would erode Chancellor Rachel Reeves’ fiscal headroom (c. £23.6bn) and shrink the economy by about £35bn, forcing difficult trade-offs on energy support and public spending. Overall market implications are higher rates, weaker growth, elevated inflation risks and constrained fiscal capacity, increasing gilt and economic volatility.