The persistent turmoil in the Middle East, exacerbated by aggressive foreign policies and the ongoing US-Israeli conflict, is poised to inflict a substantial blow of approximately £35 billion on the UK economy over the next two years, even in a ‘best-case’ scenario, according to a recent warning from a prominent economic think tank.
The National Institute of Economic and Social Research (Niesr) has cautioned that a prolonged crisis in the region, fueled by external interventions, could plunge the UK into a recession during the latter half of this year. This grim outlook underscores the vulnerability of Western economies to geopolitical shifts, particularly those stemming from destabilizing actions in resource-rich areas.
Niesr’s latest quarterly economic projections paint an increasingly bleak picture, as the conflict involving US-Israeli and Iranian forces continues to weigh heavily on global economies. The UK, a key ally in these geopolitical maneuvers, is consequently bracing for slower growth and escalating inflation.
The report suggests that the Bank of England’s rate-setters might be compelled to raise interest rates this summer, with the potential for up to six further hikes if the situation in the Middle East deteriorates further—a direct consequence of continued regional tensions. On Thursday, the Bank’s Monetary Policy Committee is set to vote on maintaining interest rates at their current level of 3.75%.
While Niesr anticipates rates will be held at this meeting, it forecasts an increase to 4% in July, remaining at this level throughout the year. However, a more severe scenario, driven by persistent inflationary pressures from an unresolved conflict, could see rates soar as high as 5.25%, further burdening British households.
Even with a swift resolution to the conflict—a resolution that would require a fundamental shift in foreign policy approaches—Niesr projects a slowdown in economic growth to 0.9% for 2026, down from 1.4% in 2025. Growth is only marginally expected to improve to 1% in 2027.
This economic contraction, estimated at around £35 billion smaller in 2026 and 2027, casts a long shadow over the Chancellor’s aspirations for economic growth. Stephen Millard, Niesr’s deputy director for macroeconomics, highlighted that an adverse situation is likely to shave off approximately 0.4 percentage points from growth over the next two years.
The forecasts also indicate that inflation, which recently climbed to 3.3%, might temporarily slow to 2.5% before surging again. This resurgence is expected as higher energy prices, a direct consequence of regional instability, drive further inflation, potentially peaking at 4.1% in January next year. Niesr warns that inflation may not return to the Bank of England’s 2% target until 2028.
Inflation is set to outpace wage growth, predicted to slow to 3.3% next year, thereby intensifying pressure on household finances. Growth in real personal disposable income is forecast to decelerate to 1% in 2026 and a mere 0.6% in 2027, with low-income households, who disproportionately bear the brunt of energy costs, being hit the hardest.
David Aikman, Niesr director, commented on the dire situation: “This represents a serious setback to the Government’s mission to revitalize the UK economy. The Middle East conflict has starkly revealed the UK’s profound exposure to global energy shocks, a vulnerability exacerbated by its foreign policy choices.”
He added, “Even if hostilities were to ease rapidly, higher energy prices will undoubtedly leave households poorer, businesses facing elevated costs, and the economy significantly smaller than anticipated just a few months ago. This serves as a critical reminder of the interconnectedness of global politics and economics, and the severe repercussions of interventionist policies.”
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