Executive Summary - New Shock, Old Vulnerabilities

National Institute of Economic and Social Research ()

National Institute Economic Outlook, 2026, issue Spring, 2-4

Abstract: The global economy has been hit by a second major shock in little more than a year. After proving more resilient than expected to the tariff shock of 2025, it now faces a new energy shock stemming from the conflict in the Middle East. The effects will vary across countries, but the United Kingdom is likely to be particularly exposed. This reflects the heavy reliance on imported gas for household energy, the close link between gas and electricity prices, and the fact that inflation has been persistently above target in recent years. At heart, this is a negative terms–oftrade shock: higher import prices reduce the United Kingdom's real income and leave households and businesses worse off. Our baseline forecast is for UK GDP to grow by 0.9 per cent in 2026 and 1.0 per cent in 2027 – downward revisions of 0.5 and 0.3 percentage points respectively relative to our February forecast. CPI inflation is expected to rise, peaking at 4.1 per cent in early 2027 before returning to the 2 per cent target in 2028. We now expect the Monetary Policy Committee to raise Bank Rate by 25 basis points this year, rather than deliver the two cuts anticipated in our previous forecast. The UK avoids a recession in our baseline, but only narrowly. The Middle East shock will also worsen the UK's public finances. The OBR's March forecast has already been overtaken by developments since then. Relative to that outlook, debt–servicing costs are likely to be higher, growth weaker, and pressure greater for additional support to compensate vulnerable households. The episode underlines how exposed the UK's fiscal position remains in a world of repeated supply shocks and heightened geopolitical instability. Risks around this baseline are skewed to the downside. In a more adverse scenario in which hostilities resume, the Strait of Hormuz remains closed, and oil prices spike to around $140 per barrel, the United Kingdom would face the prospect of a recession alongside inflation of around 5 per cent later this year.

Date: 2026
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