A360
Key Takeaways✦ Atlas AI
01
The UK faces a stagflationary shock from the Middle East conflict, with NIESR cutting its growth forecast to 0.9% while raising its inflation outlook.
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Economists project the disruption could wipe £35 billion from UK economic output over this year and next, highlighting the conflict's significant material impact.
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The Bank of England may be forced into significant interest rate hikes if energy supply issues persist, complicating its efforts to manage the fragile economy.
Atlas AI
Stagflation Fears Mount as Growth Forecasts Cut
The UK economy faces a dual threat of slower growth and resurgent inflation driven by the ongoing conflict in the Middle East, according to a stark new forecast. The National Institute of Economic and Social Research (NIESR) warned the disruption could cost the nation £35 billion in lost output over this year and next.
In its latest quarterly report published Wednesday, the prominent think tank significantly downgraded its projections for the country's economic performance. NIESR now anticipates growth of just 0.9% for this year, a sharp reduction from its previous forecast of 1.4%.
This economic slowdown coincides with a worrying outlook for rising prices. The conflict's impact on global energy markets is expected to push inflation higher and keep it there for longer, complicating the national economic picture.
Inflation to Remain Stubbornly High
NIESR's analysis suggests inflation will average 3% this year, with a projected peak of 4.1% in January 2027. This figure is more than double the Bank of England's official 2% target, indicating that the cost-of-living pressures facing households and businesses are far from over.
These projections are based on a scenario that NIESR itself describes as potentially optimistic. The forecast assumes oil prices will peak at approximately $100 per barrel in the current quarter before gradually declining to $65 per barrel by the end of next year.
However, the institute cautioned that recent geopolitical developments suggest a more severe or prolonged energy shock is a distinct possibility. According to David Aikman, Director at NIESR, the conflict is likely to have a “material impact on the U.K. economy” even if a resolution is found quickly.
Dilemma for the Bank of England
The combination of weak growth and persistent inflation presents a significant challenge for the Bank of England (BOE). The central bank may face pressure to respond with substantial interest rate increases if energy supply disruptions appear long-lasting.
Such a move would be intended to curb inflation but would also risk further dampening economic activity at a time when growth is already fragile. This classic stagflationary dilemma forces policymakers to choose between controlling prices and supporting output.
The NIESR report underscores the UK's vulnerability to international energy shocks and geopolitical instability. The path of the economy in the coming months will be heavily influenced by events unfolding in the Middle East and their subsequent impact on global commodity markets and central bank policy.
