3 scenarios for the UK – based on what happens in Iran
As tensions escalate in the Middle East, particularly with conflict in Iran threatening to disrupt key energy supplies, experts are warning of potential ripple effects on the UK.
A new analysis by RSM Consulting shows how surging oil and gas prices could reshape Britain’s economic landscape, from modest hiccups to full-blown recession.
The UK, which imports about half its energy from the region, is particularly exposed through the Strait of Hormuz, a chokepoint for 20% of global oil and significant LNG flows from Qatar.
RSM UK’s economists have outlined three plausible scenarios based on how quickly or slowly the crisis resolves. These projections factor in disruptions to global energy markets, with impacts cascading into inflation, household bills, GDP growth, and even Bank of England interest rate decisions.
Scenario 1: Best Case – Rapid Stabilisation
In the most optimistic outlook, the conflict wraps up swiftly, allowing energy exports to resume by the end of the month. Oil prices, which have spiked to around $110 per barrel from a pre-crisis $70, would retreat back to normal levels, as would gas at about 77p per therm (down from 140p).
The economic fallout is relatively contained. GDP growth might take a minor hit of just 0.1 percentage points, while inflation averages only 0.1 points higher for the year.
Petrol prices could briefly climb to £1.50 per litre from the current £1.32 average, and household energy bills might rise by about 4% under the July price cap reset.
For the BoE, this means holding rates steady in March but proceeding with cuts in April and another in the summer. The focus shifts back to a softening labour market rather than inflation pressures.
“Our economic forecasts would only be modestly changed… It would also mean that interest rate cuts are delayed rather than cancelled,” RSM Consulting said.
Overall, this scenario suggests the UK dodges major damage, with limited knocks to growth and consumer spending.
Scenario 2: Muddling Through – Elevated Prices Persist
If prices stay stuck at elevated levels, $110 per barrel for oil and 140p per therm, through the rest of 2026, the UK enters a ‘stagflationary’ phase. Growth could be shaved by about 0.5 percentage points, bringing it down to a sluggish 0.5% to 1%.
In this scenario, inflation becomes the bigger headache. The energy price cap could jump 10% in July, adding 1.2 percentage points to overall inflation. Instead of dipping back to the BoE’s 2% target and ending the year between 2% and 2.5%, prices might never hit that mark and climb above 3%.
“That would add about 1.2ppts to inflation this year, meaning that rather than falling back to 2% and ending the year between 2% and 2.5%, inflation never reaches 2% and quickly climbs back above 3%,” the report states.
The BoE faces a tough call here. With inflation stubbornly high, above 2% for nearly five years, it might shelve further rate cuts this year, though hikes aren’t on the table.
Businesses, already grappling with higher taxes, insolvencies, and a weaker labour market than in 2022, would struggle to pass on costs, exacerbating the slowdown.
Scenario 3: Worst Case – Prolonged Disruption and Surge
The nightmare scenario unfolds if the Strait of Hormuz stays blocked long-term, slashing exports and driving oil above $110 per barrel and gas to 240p per therm, echoing the scale of the Russia-Ukraine shock.
This could tip the UK into recession, with inflation soaring toward 5%. Petrol hits £1.60 per litre, and the energy price cap balloons by 80% in July, hammering household incomes and business viability.
The BoE might initially pause on rates but could hike later to anchor expectations and prevent wage spirals, deepening the downturn.
“That would almost certainly mean a recession… This is probably the only scenario where the government feels under pressure to provide some sort of support to offset the hit to real household incomes and businesses,” RSM warns.
A looser labour market might temper second-round inflation effects, but with businesses in a frailer state than in 2022, the risks are amplified. Government intervention, like subsidies, could become inevitable to cushion the blow.
