How Much is the Iran War Costing the UK Economy? - NIESR
Post Date10 August, 2026Reading Time3 min readThe conflict in the Middle East is weighing on UK economic activity. As the UK imports about half of its energy, when energy prices rise, we must give up more of. . .
Post Date10 August, 2026Reading Time3 min readThe conflict in the Middle East is weighing on UK economic activity. As the UK imports about half of its energy, when energy prices rise, we must give up more of what we produce to buy the same amount of energy as before. This worsens our terms of trade and creates a real supply shock which leaves the UK poorer. But, how much worse-off is the UK economy due to the conflict? We answer this question by comparingour latest Summer Economic Outlookwith our pre-war forecast from January. Comparing forecast, we expect GDP growth in 2026 to be weaker than we thought in January. The drag continues partially into 2027, despite a small rebound. By the start of 2028, the effect on GDP growth has faded and the economy returns to its trend growth rate, as detailed below. The energy shock therefore lowers growth temporarily, taking 0. 3 per cent off GDP growth this year and 0. 2 per cent off next year, before a return to the trend rate of 1. 3 per cent. However, the temporary reduction in the rate of growth leaves thelevelof real GDP persistently lower after the rate of growth has returned to normal. This is best illustrated by plotting our real GDP forecasts in levels. The gap that opens between the forecasts over the next two years equates to real GDP being around £11. 5 billion lower in 2026 and £17 billion lower in 2027 – equal to about the capital expenditure Department for Transport (excl. HS2) for the same period. Thereafter, real GDP remains around £12. 8 billion lower than it was forecast to be prior to the Iran war. This is equivalent to the Ministry of Justice budget or 0. 4 per cent of annual GDP. Another way to show this is the percentage deviation between the latest forecast and the January baseline. The chart above shows the percentage difference between the latest forecast and the January baseline for real GDP. The peak impact of the shock is expected in the third quarter of 2026, with a 0. 8 percent lower forecast to real GDP relative to our January forecast. Thereafter, the path for real GDP stabilises and remains around 0. 4 percent lower than the pre-war forecast. So how much will the Iran war cost the UK economy? Over the first two years, the shock reduces cumulative real GDP by about £28. 5 billion. From 2028 onwards, the economy returns to its normal growth rate, but annual real GDP going forward remains around £12. 8 billion lower than it would otherwise have been.