Middle East Conflict Could Trigger UK Recession as Oil Prices Surge, Analysis Warns
New research from Oxford Economics indicates that the ongoing war in the Middle East poses a severe threat to the UK economy, with the potential to plunge the nation into a recession if oil prices continue to climb over the coming months. The analysis highlights a worst-case scenario where Brent Crude Oil prices jump from approximately $97 to $140 per barrel and remain elevated until at least May, rattling global economic stability.
Economic Projections and Inflation Concerns
The report suggests that in this scenario, global GDP would decline by 0.7% by the end of the year due to the conflict involving the US, Israel, and Iran. Inflation is projected to jump to an average of 5.1%, with the UK experiencing a delayed impact in the second half of the year because of energy price-setting delays by Ofgem. Economists warn that higher inflation and a potential 25 basis point interest rate hike by the Bank of England could combine to push the UK into a recession, albeit later than the US due to lagging price rises.
"Justifying this hawkish shift is the fact that once inflation rises above a certain threshold, households and firms tend to pay closer attention to inflation, and that can start to influence inflation expectations," economists at Oxford Economics stated. "Consumers' short-run inflation expectations are driven by routine expenses like gasoline and food, both of which are expected to escalate due to the shock."
Recession Warnings and Alternative Scenarios
The analysis notes that a global price rise would be lower than the spike seen in 2022, but the recession warning hinges critically on oil price changes. In a better-case scenario where oil prices stabilize around $100 per barrel, a recession might be avoided, but global growth would still suffer a 0.2 percentage point reduction. "The strength of the subsequent recovery will be determined by how quickly shipping through the Strait of Hormuz rebounds and how fast oil prices, supply-chain stresses, and financial market conditions ease," said Oxford Economics chief researchers Ben May and Ryan Sweet.
They added that while financial markets have historically rebounded quickly after major Middle East conflicts since the 1990s, "this time it could be more gradual." International efforts to mitigate the crisis include the largest-ever oil release from global reserves by International Energy Agency members, though several Gulf countries have reneged on energy supply contracts and slowed production due to the war.
Political and Business Responses
Labour ministers have remained tight-lipped on whether the government plans to unveil an energy price support package for households. Chancellor Rachel Reeves acknowledged there is "scope" for such a package, while Sir Keir Starmer indicated that the end of the fuel duty freeze later this year is "under review." An internal UK government assessment, reported by Bloomberg, warns that oil prices could hit $130 per barrel by mid-April if the war persists.
President Trump has attempted to calm market tensions by claiming the US is running out of targets in Iran, but oil prices surged again on Thursday amid fears that the Strait of Hormuz remains closed. Business leaders across the UK are raising alarms, with over half of directors polled by an accountancy lobby group warning they are "exposed" to the conflict.
"Our data shows that rising energy costs and supply chain disruption are the biggest threats to businesses right now as the conflict in the Middle East continues to escalate," said Allan Vallance, chief executive of The Institute of Chartered Accountants in England and Wales. "Surging gas prices and interruptions to major energy infrastructure, such as the Strait of Hormuz, means the pressure is only intensifying."
Vallance emphasized the significant interdependence between UK businesses and the Middle East, noting that "our economic fate is exposed to instability in the region." This underscores the broader economic vulnerabilities as the conflict unfolds, with potential long-term repercussions for the UK's financial health.
