NIESR warns Iran war could tip UK toward recession

A UK thinktank has warned that the Iran war’s energy shock could knock £35bn off Britain’s economy and push the country toward recession, with the risk rising sharply if oil prices spike further. The Guardian reports the National Institute of Economic and Social Research (NIESR) modelled scenarios where Brent crude climbs as high as $140 a barrel, calling that outcome “severe but plausible”. Brent was trading around $111 in the report’s baseline timeframe.

The immediate transmission mechanism is old-fashioned: higher oil prices feed directly into household bills, transport costs, and the price of imported goods. NIESR says the UK is “highly exposed” to global energy shocks, a vulnerability that persists even when domestic inflation is driven by other factors. The same shock also hits public finances: the thinktank estimates the conflict could add almost £24bn to government borrowing by the end of the decade, eroding Chancellor Rachel Reeves’s headroom under her fiscal rules.

Policy responses split into two uncomfortable tracks. On the monetary side, NIESR sketches a world where inflation rises above 5% under the adverse oil-price scenario, potentially forcing the Bank of England into a large one-off rate increase—up to 1.5 percentage points in its modelling, the biggest move since Black Wednesday in 1992. Yet markets, according to the Guardian, largely expect the Bank to hold rates steady at its next meeting after keeping them unchanged at 3.75% last month, with only an outside probability of a quarter-point rise.

On the fiscal side, Reeves has said “nothing is off the table” for a targeted and temporary support package. That phrasing matters because the state is being asked to cushion energy bills at the same time as higher prices are widening the deficit the government says it must contain. Any support also has to be designed quickly enough to matter while avoiding a repeat of broad subsidies that blunt price signals and keep consumption high when supply is constrained.

The labour-market warning is less about job losses in the oil sector than about knock-on effects from weaker demand. Slower growth compresses private investment plans, while higher financing costs make it harder for firms to bridge a period of volatile input prices. NIESR’s baseline still assumes energy prices cool over time; its deputy director Stephen Millard told the Guardian that assumption—oil falling back to roughly $65 over two years—now looks increasingly optimistic.

The UK can neither reopen the Strait of Hormuz nor set global oil prices. It can, however, decide whether to treat energy as a household bill to be socialised through the budget or a constraint to be absorbed through lower consumption and tighter margins.

NIESR’s modelling puts a price tag on the choice: £35bn in lost output and a fiscal rulebook that stops working when the fuel bill does not.