Investing.com — The UK economy will be around £35 billion smaller over 2026 and 2027 combined than previously forecast, even under a best-case scenario in which hostilities in the Middle East are resolved rapidly, according to the National Institute of Economic and Social Research’s latest economic outlook.
NIESR has revised down its GDP growth forecasts to 0.9% for 2026 and 1.0% for 2027, representing downward revisions of 0.5 and 0.3 percentage points respectively from its February forecast. The research institute warned that the UK avoids a recession in its baseline forecast, but only narrowly.
The downgrade reflects a new energy shock stemming from conflict in the Middle East, which has hit the global economy after it proved more resilient than expected to 2025’s tariff shock. The UK is particularly exposed due to its heavy reliance on imported gas for household energy and the close link between gas and electricity prices.
CPI inflation is expected to peak at 4.1% in early 2027 before returning to the 2% target in 2028. Inflation stood at 3.3% in March, up from 3.0% in February. NIESR now expects the Monetary Policy Committee to raise Bank Rate by 25 basis points this year, rather than deliver the two cuts anticipated in its previous forecast.
The energy shock stems from US and Israeli strikes on Iran that began on February 28, followed by Iran’s attacks on energy infrastructure in Gulf States and its closure of the Strait of Hormuz. This sent oil and gas prices sharply higher. Petrol prices have risen 17% since February, and NIESR expects a 12% rise in the household energy price cap in July.
The unemployment rate is projected to peak at 5.5% in the fourth quarter of 2026, up from 4.9% in the three months to February. Wage growth is expected to slow to 3.3% in 2027 from 3.8% in the three months to February.
In a more adverse scenario in which hostilities resume and oil prices spike to around $140 per barrel, the UK would face recession alongside inflation of around 5% later this year.
The energy shock will also worsen the UK’s public finances. Relative to the Office for Budget Responsibility’s March forecast, debt-servicing costs are likely to be higher and growth weaker. The UK has not run a primary surplus since 2001.