UK Faces £35bn Economic Hit and Recession Risk as Iran Conflict Disrupts Markets, Thinktanks Warn

Lead

The UK is facing a potential £35bn economic hit and an increased risk of recession this year as the escalating conflict between the US, Israel, and Iran disrupts global energy markets and supply chains, according to a series of reports from leading economic research institutes and business surveys. Chancellor Rachel Reeves has summoned the heads of Britain’s five largest retail banks for an emergency summit to discuss measures to protect households most vulnerable to rising mortgage costs.

Coverage Comparison

The warnings come from multiple sources, each highlighting different facets of the crisis. The National Institute of Economic and Social Research (Niesr), Britain’s oldest independent economic research institute, projects a £35bn hit to the economy and has downgraded its growth forecasts for 2026 and 2027. The EY Item Club, an economic forecasting group, anticipates a quarter of a million job losses by mid-2027, with the economy stagnating in the second and third quarters of this year.

Meanwhile, separate surveys from GfK and S&P Global reveal that UK consumer confidence has fallen sharply, and businesses are facing the biggest jump in costs since 1996. The reports converge on a common theme: the Iran war, triggered by US and Israeli attacks and Iran’s retaliatory closure of the Strait of Hormuz, has dealt a severe blow to an economy that had only recently begun to show signs of recovery.

While the exact figures vary between the reports, the overall picture is consistent: the UK is bracing for a significant economic slowdown, rising inflation, and increased unemployment, with the most vulnerable households likely to bear the brunt.

Key Claims

• £35bn economic hit: Niesr warns that even under a best-case scenario, the UK economy will grow at a much slower pace this year and next due to the Middle East conflict. The institute has downgraded its 2026 growth forecast by 0.5 percentage points to 0.9%, and its 2027 forecast by 0.3 points to 1%.

• Quarter of a million job losses: The EY Item Club predicts unemployment will rise to 5.8% by mid-2027, up from the current five-year high of 5.2%, with almost 250,000 additional people losing their jobs. This would increase the number of jobseekers from 1.87 million to over 2.1 million.

• Growth halving: The EY Item Club expects growth to halve from 1.4% in 2025 to 0.7% this year, with the economy flatlining in the second and third quarters, risking a technical recession.

• Mortgage costs rising: More than 1 million UK households could see their loan servicing costs increase, according to the Bank of England. Banks have already pulled about 1,500 mortgage products and raised rates on many of their remaining 7,000 home loan products.

• Consumer confidence falls: GfK’s consumer confidence index slid by four points to -25 in April, its lowest since October 2023. Neil Bellamy, GfK’s consumer insights director, said, “Consumers really do have the jitters now.”

• Cost pressures surge: S&P Global’s purchasing managers’ index showed UK service sector firms experienced the biggest jump in costs since 1996 between March and April, with raw material prices also rising rapidly in manufacturing.

• Banks summoned: The chief executives of HSBC, Barclays, Lloyds, NatWest, and Santander have been asked to attend an emergency summit with Chancellor Reeves to discuss protecting borrowers, including an update on the government’s mortgage charter supporting 1.6 million customers whose fixed-rate deals end this year.

Perspectives

Government’s response: Chancellor Rachel Reeves has said “nothing is off the table” as the government considers a targeted and temporary support package. The meeting with bank chiefs aims to ensure forbearance for struggling mortgage holders, but Niesr director David Aikman noted that the inflation shock will make it harder for Reeves to respond, calling the situation “a serious blow to the government’s mission to get the UK economy growing again.”

Economic forecasters: The EY Item Club’s chief economic adviser, Matt Swannell, said, “Spiralling energy costs and disruption to supply chains will push the UK to the brink of a technical recession in the middle of this year. Consumers’ spending power will be squeezed, while more expensive financing will weigh on business investment.” Niesr also warned that if the global oil price hits $140 a barrel, UK inflation could rise above 5%, potentially forcing the Bank of England to raise interest rates by the most in a single move in decades.

Business and consumer sentiment: Surveys show businesses are preparing to raise prices, and finance bosses at large UK firms are already reining in spending plans, according to Deloitte. The CBI lobby group reported sentiment among industrial firms plunged at the fastest rate since the onset of the Covid pandemic. Meanwhile, the Office for National Statistics found more than a quarter of firms expected to increase the price of their goods or services.

Mortgage market pressure: The Bank of England’s financial policy committee noted that banks have withdrawn around 1,500 mortgage products and raised rates on many others, a trend dubbed “Trumpflation” after US President Donald Trump. With more than a million households facing higher loan costs, the forbearance of major lenders will be key to preventing a broader shock to the economy.

This article draws on reports from The Guardian, which cited data from Niesr, the EY Item Club, GfK, S&P Global, the CBI, Deloitte, the Bank of England, and the Office for National Statistics.