NIESR forecasts UK slowdown and above-target inflation through 2028 amid Middle East conflict

London, United Kingdom. Britain’s economy is expected to slow sharply this year and in 2027 due to the Iran war, while inflation is forecast to remain above the Bank of England’s target until 2028, according to the National Institute of Economic and Social Research.

Inflation outlook linked to energy prices

NIESR said it expected the pace of price growth to increase to 4.1% at the start of 2027 from 3.3% currently, driven by higher oil and gas prices linked to the conflict in the Middle East. It forecast inflation would return to the BoE’s 2% target only in 2028, after being the highest among advanced economies for much of the past four years.

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Growth forecasts revised lower

The think tank projected economic growth of 0.9% this year and 1% in 2027, down from its February forecasts of 1.4% and 1.3% for this year and next. NIESR’s 2026 growth forecast was slightly above the IMF’s latest projections.

NIESR director David Aikman said the Middle East conflict had highlighted the UK’s exposure to global energy shocks.

Labour market projections

NIESR forecast wage growth would slow to 3.3% in 2027 as the labour market weakens. It projected the unemployment rate would peak at 5.5% in the fourth quarter of 2026, slightly above its February forecast.

Recession risk in adverse scenario

In an adverse scenario where the conflict continues and oil prices rise further, NIESR said there was a high likelihood Britain would enter a recession in the second half.

Interest rate expectations

NIESR predicted the BoE would raise rates only once this year in July, taking the benchmark rate to 4% from 3.75%. In the adverse scenario, it said policymakers would need to increase rates by 150 basis points, equivalent to six quarter-point hikes, bringing the Bank Rate to 5.25%.

How do you think higher energy prices could affect household budgets in the coming year?