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The energy price shock triggered by Donald Trump’s military strikes and Iran’s retaliation will wipe £35billion from the UK economy in a best-case scenario, a major new analysis warns. Chancellor Rachel Reeves is set to face agonising choices in the Autumn Budget, with the National Institute of Economic and Social Research (NIESR) downgrading its growth forecasts. Two interest rate cuts had been forecast this year, but a hike of 0.25 points is now expected in July to combat a jump in inflation.

The economy is now expected to grow by just 0.9% this year (-0.5 points) and 1% in 2027 (-0.3 points). Even if hostilities in the Middle East are resolved rapidly, the economy is expected to be around £35billion smaller over this year and next than previously forecast. However, if the crisis drags on, the experts can see an “adverse scenario” in which the economy is £68billion smaller.

David Aikman, director of the NIESR, said: “This is a serious blow to the Government’s mission to get the UK economy growing again. The Middle East conflict has laid bare the fact that the UK remains highly exposed to global energy shocks. Even if hostilities ease rapidly, higher energy prices will leave households poorer, businesses facing higher costs, and the economy materially smaller than we expected only a few months ago.”

The economic watchdog warns the Chancellor will face “tough calls” in the autumn Budget, with higher inflation resulting in a “severe squeeze on real government spending.” Boosting spending would involve “higher taxes or breaking the fiscal rules”.

Unemployment is expected to peak at 5.5% in the last quarter of this year. Meanwhile, growth in real disposable income is on course to slow to just 1% this year and 0.6% next year.

NIESR warns that “low income households who tend to spend a larger share of their budgets on energy will be hit hardest”. Inflation is expected to peak at 4.1% in January next year.

High Government debt, according to NIESR, is the “big problem” and there is “no sign of this coming down anytime soon”.

Stephen Millard, a deputy director of NIESR, said the oil price shock means “the UK will be poorer”. However, he said that supporting poorer families through this period “is going to prove very, very difficult for the Chancellor”.

Shadow Chancellor, Sir Mel Stride, said: “This is the bill for a fragile economy left exposed by Rachel Reeves – £35 billion wiped out, and families squeezed. We are getting poorer because of Labour’s choices. Even the best case now means higher prices and lower living standards. Britain cannot afford for Rachel Reeves and Keir Starmer to stay in Downing Street – they must both go now, and Labour must urgently change course.”