UK growth seen at 0.9% as West Asia energy shock drives inflation higher: Research

Britain’s economy is heading for a sharper slowdown this year as rising energy prices linked to the conflict in West Asia push up inflation and weigh on household spending, according to fresh estimates from the National Institute of Economic and Social Research (NIESR).

In its latest quarterly outlook released on Wednesday, the think tank cut the United Kingdom’s growth forecast for 2026 to 0.9 per cent, down from 1.4 per cent projected earlier. NIESR also expects growth of just 1 per cent in 2027, signalling a prolonged period of weak economic momentum.

This broadly aligns with other global forecasts. The International Monetary Fund (IMF) has projected UK growth at 0.8 per cent for 2026, marking one of the steepest downgrades among advanced economies. That places Britain at the lower end of the Group of Seven (G7) growth table.

Inflation to stay higher for longer

Alongside weaker growth, inflation is expected to remain stubbornly high. NIESR said consumer price inflation will average around 3 per cent this year and peak at 4.1 per cent in early 2027 — well above the Bank of England’s 2 per cent target.

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Official data already shows inflation rising to 3.3 per cent in March, driven largely by a surge in fuel costs, with motor fuel prices recording their biggest monthly jump since 2022.

While grocery inflation has not yet fully reflected the energy shock, recent retail data showed food price growth easing to around 3.8 per cent, analysts warn that higher energy and transport costs will eventually feed through to supermarket shelves.

Global shock, with India in the mix

The UK’s troubles are part of a wider global shift. NIESR expects global growth to slow to 2.9 per cent in 2026, down from 3.4 per cent in 2025, as higher energy prices tighten financial conditions and reduce demand.

Major economies are already feeling the impact. The United States is expected to grow around 2 per cent this year, while the euro area may slow to about 1 per cent. Inflation is also rising again across regions, complicating central bank policies, the think tank said.

According to the research, emerging economies such as India are relatively better placed, with stronger growth prospects, but remain vulnerable to higher crude oil prices.

“Among the major emerging markets, China and India continue to expand relatively quickly, but both remain vulnerable through higher energy costs and weaker external demand,” NIESR said.

Why UK is more exposed

The UK is particularly vulnerable to this shock because of its heavy reliance on imported gas and the way energy prices feed quickly into household bills. NIESR estimates that the economy could lose around 35 billion pounds in output across 2026 and 2027 due to the energy shock.

In simple terms, higher import costs reduce the country’s overall income, leaving both households and businesses worse off. This “terms-of-trade shock” means people pay more for essentials while earning relatively less in real terms.

The impact is already visible. Petrol prices have risen sharply since February, and household energy bills are expected to climb further, with a projected increase in the price cap later this year.

Jobs and wages under pressure

The slowdown is also expected to affect jobs and wages. NIESR forecasts the unemployment rate will rise to about 5.5 per cent by late 2026, up from around 4.9 per cent currently.

At the same time, wage growth is expected to slow to around 3.3 per cent in 2027, meaning incomes may not keep pace with inflation. This could further dampen consumer spending, a key driver of the UK economy.

Bank of England faces policy dilemma

The outlook puts the Bank of England in a difficult spot. To control inflation, central banks typically raise interest rates, but higher rates can further slow economic activity.

NIESR now expects at least one rate hike this year, taking borrowing costs to around 4 per cent. However, financial markets are pricing in the possibility of two or even three increases by the end of 2026.

In a worst-case scenario — if the conflict escalates and oil prices surge further — NIESR warns that rates may need to rise sharply, potentially to above 5 per cent, increasing the risk of a recession.