UK economy forecast to take £35bn hit from Middle East conflict as business distress surges
Oil touched a one-month high of $115 per barrel on Tuesday as new forecasts warned the UK faces a £35 billion blow from the Middle East hostilities, even if tensions ease quickly, and fresh data showed a sharp rise in corporate financial distress.
The National Institute of Economic and Social Research said in its latest quarterly Economic Outlook that, in a best-case scenario, the crisis would drain £35 billion from the UK economy across this year and through the end of 2027. The institute said the conflict has materially weakened the outlook by triggering an energy price shock, pushing up inflation and eroding consumer spending power.
It is also factoring in a stall in UK growth in the second half of the year. “This is a serious blow to the government’s mission to get the UK economy growing again,” said NIESR director Dr David Aikman, adding that the situation has exposed how highly the UK remains exposed to global energy shocks.
Even if hostilities ease rapidly, he said, higher energy prices would leave households poorer, businesses facing higher costs and the economy smaller than NIESR expected only a few months ago. The oil price spike followed geopolitical jitters after US President Donald Trump signalled plans to step up military activity to blockade Iran.
The perceived vulnerability of the UK to fossil fuel supply shocks has prompted renewed calls for more North Sea exploration and drilling, but green industrialist Dale Vince, the owner of Ecotricity, argued the crisis underlines the need to move away from fossil fuels.
He told Sky News that nearly all North Sea oil is exported and that prices are set on global markets, meaning more domestic production would not shield the UK from high costs. He also warned that additional drilling would undermine climate targets. Evidence of strain is already showing in corporate finances.
Business recovery firm Begbies Traynor Group reported that the number of UK companies in “critical financial distress” rose by 36.9% to 62,193 in the first quarter of 2026 compared with the same period in 2025. Firms in “significant” distress increased nearly 10% year on year to 634,867.
The timing of the conflict is adding particular pressure to hotels, leisure and entertainment, with hospitality already contending with higher labour costs and taxes over the past year. “The shockwaves from a war in the Middle East will be felt across every corner of the global economy for some time to come,” said Ric Traynor, Begbies Traynor’s executive chair.
After early signs of improvement at the start of the year, he said, the UK appears to have taken “a few steps backwards” following one of the most severe energy shocks in recent memory. Not all sectors are moving in lockstep. Lloyds Banking Group said its first-quarter 2026 profits were up, despite a £151 million impairment charge linked to the conflict.
With energy costs elevated and demand under pressure, NIESR’s baseline assumes a slower, weaker recovery than previously expected. The institute’s warning, coupled with rising distress among businesses, points to a challenging second half of the year unless energy prices retreat and tensions ease.