Will the Iran War Push the UK Economy Into a Recession?

Why It Matters

Understanding the transitory nature of the Middle East energy shock helps firms and investors anticipate stable monetary policy and avoid over‑reacting to short‑term inflation spikes, preserving growth prospects.

Key Takeaways

• Energy price shock from Middle East war deemed transitory
• Inflation spike expected to peak mid‑year, then recede
• Bank of England unlikely to raise rates aggressively this cycle
• Swap markets overreacting, pricing more hikes than warranted
• UK economy has more slack than in 2022, reducing recession risk

Summary

The video examines whether the ongoing conflict in the Middle East could push the United Kingdom into a recession. Morningstar international economist Grant Slade argues that the current energy‑price shock is fundamentally transitory, with futures markets indicating a peak in mid‑year followed by a gradual decline, limiting the inflationary impact. Slade highlights key differences from the 2022 Ukraine war: the UK now enjoys greater economic slack, unemployment is modestly higher, and wage growth has slowed. Consequently, the Bank of England is expected to look through the temporary price spike rather than tighten monetary policy aggressively, reducing the likelihood of a hard landing. He notes that interest‑rate swap markets have over‑reacted, shifting from pricing rate cuts to multiple hikes due to uncertainty about the war’s duration and a recency‑bias from the 2022 energy shock. Slade emphasizes that the current spike, while notable, is far less severe than the 2022 gas price surge, and investors may be pricing in excessive policy responses. The implication for businesses and investors is clear: short‑term inflation pressures are likely to subside without drastic monetary tightening, preserving credit conditions and limiting recession risk. However, monitoring the conflict’s trajectory remains essential, as prolonged disruptions could still reshape energy markets and fiscal outlooks.

Original Description

Energy-driven inflation is set to spike amid the Iran war, but multiple Bank of England rate hikes in 2026 are unlikely, says Morningstar international economist Grant Slade.

http://www.morningstar.co.uk

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