Middle East war could wipe £35bn off economy in 'best-case scenario', economists warn

The National Institute of Economic and Social Research (Niesr) said that a more protracted crisis in the Middle East could see the UK enter a recession in the second half this year.

The group’s latest quarterly economic projections pointed to an increasingly gloomy outlook as the war between US-Israeli and Iranian forces weighs on economies globally, with the UK set for slower growth and rising inflation.

It indicated that the Bank of England’s committee rate-setters are likely to increase interest rates this summer as a result, with the potential for up to six more hikes in a more severe scenario.

Today, the Bank’s Monetary Policy Committee will vote on whether to keep interest rates at their current level of 3.75 per cent.

Niesr said it expects interest rates to be held at this meeting, but predicted they will be increased to 4 per cent in July – staying at this level through the rest of the year.

However, it said a severe scenario, which would see further inflationary pressure from a continuing conflict, could result in rates rising as high as 5.25 per cent.

In its best-case scenario which would include a resolution in the Middle East this year, the organisation still pointed towards a slowdown in economic growth to 0.9 per cent for 2026, compared with 1.4 per cent growth in 2025.

Even with a swift resolution to the conflict, Niesr said the UK economy will be around £35bn smaller in 2026 and 2027, casting uncertainty over the Chancellor’s ambitions to grow the UK economy.

David Aikman, Niesr director, said: “This is a serious blow to the Government’s mission to get the UK economy growing again.

“The Middle East conflict has laid bare the fact that the UK remains highly exposed to global energy shocks.

“Even if hostilities ease rapidly, higher energy prices will leave households poorer, businesses facing higher costs, and the economy materially smaller than we expected only a few months ago.”

Meanwhile, research from Begbies Traynor Group (BTG) has found that the number of companies considered in “critical financial distress” rose by 36.9 per cent to 62,193 for the quarter, compared with the same period a year earlier.

The number of businesses in “significant” financial distress meanwhile rose by 9.6% year on year to 634,867.

Firms have faced pressure from a number of tax increases over the past year, including increases to national insurance contributions.

It also comes amid a backdrop of shaky consumer confidence, particularly affecting sectors reliant on discretionary spending habits.

“These challenges have been exacerbated by energy and materials inflation following the outbreak of war in the Middle East towards the end of the quarter,” BTG said.

The survey found that hotels and accommodation firms had the highest level of distress, with 69.3 per cent of these saying they are in a “critical” position.

The Prime Minister’s official spokesman said: “This isn’t our war but it is one we need to respond to.

“While the economic impact remains uncertain, our economic plan meant we entered this crisis in a better position than we would have done.

“The best way to protect our economy is through diplomacy … and taking responsible action to support families and businesses that most need help.”