Niesr Warns Iran War Could Cost UK £35bn

The warning, published on 29 April 2026, according to the Guardian, represents one of the starkest assessments yet of how the escalating Middle East conflict could ripple through domestic business conditions. For operators running mid-market firms, the detail beneath the headline figure matters more than the number itself: the transmission runs through energy costs, supply-chain friction, tighter credit, and weaker consumer demand.

What Niesr is forecasting, and how bad it could get

Niesr's central message is that even the best-case outcome is materially worse than the outlook that prevailed before the conflict escalated. According to the think tank's analysis, as reported by the Guardian, the UK economy would grow at a "much slower pace" in both 2026 and 2027 under a benign scenario. Under its worst case, the economy contracts outright, producing a technical recession this year.

The £35bn figure represents the cumulative GDP shortfall in the adverse scenario. For context, the energy shock that followed Russia's full-scale invasion of Ukraine in 2022 shaved an estimated 1.0 to 1.5 percentage points off UK GDP growth over the following 18 months, according to Bank of England analysis published at the time. Niesr's worst-case projection implies a drag of comparable or greater magnitude.

Before the conflict intensified, the Office for Budget Responsibility's March 2026 forecast pencilled in GDP growth of roughly 1.9% for 2026 and 1.8% for 2027, while the Bank of England's February 2026 Monetary Policy Report projected growth of around 1.5% for 2026. Both sets of figures now look optimistic. Niesr's analysis suggests that even its best-case path would fall short of those pre-conflict benchmarks, with the adverse scenario turning growth negative.

How the conflict feeds through to UK business costs

Energy prices

The most direct channel is energy. Brent crude has climbed sharply since hostilities escalated, with prices trading well above the $80–85 per barrel range that prevailed in early 2026. UK wholesale gas prices have followed a similar trajectory, driven by concerns over supply disruption in the Gulf and knock-on effects on global liquefied natural gas flows.

Energy costs were already a persistent pressure point. The Federation of Small Businesses (FSB) has repeatedly found that energy ranks among the top three cost concerns for UK SMEs, a position it has held almost continuously since the 2022 spike. The British Chambers of Commerce (BCC) Quarterly Economic Survey for Q1 2026 similarly flagged energy as a leading drag on margins, particularly for manufacturers and logistics operators.

For energy-intensive sectors, the arithmetic is punishing. Businesses that locked in fixed-rate contracts during the relative calm of late 2024 and early 2025 may find themselves exposed when those deals roll off. Those on variable tariffs are already absorbing higher costs.

Supply chains

The Strait of Hormuz remains the world's most important oil chokepoint. Any sustained disruption to shipping through the Gulf would affect not just energy but a wide range of goods that transit the region. UK importers with exposure to Asian manufacturing routes that pass through or near the conflict zone face longer lead times, higher freight insurance premiums, and greater uncertainty over delivery schedules.

The 2022 precedent is instructive. Supply-chain disruption following the Ukraine invasion added an estimated 10–15% to container shipping costs on key routes within weeks, according to Drewry Shipping Consultants data from that period. A similar or larger spike is plausible if Gulf shipping lanes are materially affected.

Consumer confidence

Recession talk itself depresses spending. GfK's consumer confidence index, the UK's longest-running measure, tends to deteriorate rapidly once recession becomes a mainstream narrative. Businesses exposed to discretionary consumer spending, from hospitality to non-essential retail, are likely to feel the drag first.

What operators should watch: energy, credit, and demand signals

Energy hedging and contract exposure

Finance directors should map their energy contract renewal dates against the conflict timeline. Firms whose fixed-rate deals expire in the next six to twelve months face the greatest margin risk. Wholesale forward curves, published daily by Ofgem and major trading platforms, offer the clearest signal of where the market expects prices to settle.

Credit conditions

A recession or near-recession environment typically tightens lending. The Bank of England's Credit Conditions Survey, published quarterly, is the most reliable leading indicator. The Q1 2026 edition, released in April, will show whether lenders have already begun pulling back on facilities for smaller firms. Historically, SME credit availability deteriorates faster than headline bank lending data suggests, because smaller firms sit at the margin of lenders' risk appetite.

Demand indicators

The BCC's Quarterly Economic Survey and the S&P Global/CIPS UK Purchasing Managers' Index (PMI) both offer near-real-time reads on order books and output expectations. A sustained PMI reading below 50 signals contraction. The March 2026 composite PMI was already softening before the full scale of the conflict's economic impact became clear.

Policy responses that could follow

Niesr's warning increases the probability of fiscal or regulatory intervention from the Starmer government. Several channels are worth monitoring.

First, energy support. The government wound down the Energy Bills Discount Scheme for businesses in 2024, but a sustained price spike could force a successor programme. Any such scheme would likely be targeted at energy-intensive SMEs rather than offered universally, given fiscal constraints.

Second, tax policy. The Chancellor may face pressure to delay or soften planned increases in employer National Insurance contributions or business rates reforms if the economy weakens materially. The Autumn Budget, expected in late October or November 2026, would be the natural vehicle for any adjustment.

Third, monetary policy. The Bank of England's Monetary Policy Committee faces a familiar dilemma: an energy-driven supply shock that pushes up inflation while simultaneously weakening demand. In 2022, the MPC chose to prioritise inflation and raised rates aggressively. Whether it follows the same path this time depends on how far core inflation, stripped of energy effects, remains above target. Rate cuts would ease borrowing costs for indebted firms; rate holds or hikes would not.

None of these responses is certain. But the direction of travel, a government under pressure to act, and a central bank caught between competing objectives, is familiar territory for anyone who operated a business through 2022 and 2023.

The Niesr forecast is a scenario, not a certainty. Conflicts can de-escalate. Energy markets can stabilise. But the think tank's core point stands: even the optimistic path is worse than what the UK economy was expecting three months ago. For operators, the practical response is the same regardless of which scenario materialises: stress-test costs, watch the leading indicators, and plan for weaker demand.