The Middle East energy shock could plunge the UK into recession and wipe close to £70billion off the economy over the next two years, according to a doom-laden report.

In a bleak assessment of Britain's prospects, the National Institute of Economic and Social Research (Niesr) said the economy will be £35billion smaller than previously thought by the end of 2027 in a 'best case' scenario.

And it warned under more 'adverse' conditions – where the Strait of Hormuz remains closed and oil spikes to $140 a barrel – some £68billion would be wiped off the economy.

Under these circumstances, Niesr said: 'The United Kingdom would face the prospect of a recession alongside inflation of around 5 per cent later this year.'

The Niesr report is just the latest to point to an increasingly gloomy outlook as the Iran war weighs on economies globally, with the UK set for slower growth and rising inflation.

Niesr director David Aikman 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.'

It was seized on by the Tories as further evidence of how vulnerable Britain has been left by Labour's tax hikes and energy policies.

Shadow chancellor Sir Mel Stride said: 'This is the bill for a fragile economy left exposed by Rachel Reeves. 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.'

Worryingly for millions of borrowers, Niesr indicated that the Bank of England will be forced to raise interest rates this summer, with the potential for up to six hikes in a more severe scenario.

On Thursday, the Bank's Monetary Policy Committee will vote on whether to keep interest rates at their current level of 3.75 per cent.

Niesr said it expects interest rates to be held at this meeting, but predicted they will be increased to 4 per cent in July and stay at this level through the rest of the year.

However, it said a severe scenario, which would see further inflationary pressure from a continuing conflict, could result in rates rising as high as 5.25 per cent.

In its best-case scenario which would include a resolution in the Middle East this year, Niesr forecast economic growth of just 0.9 per cent for this year, having previously pencilled in 1.4 per cent.

It also cut its growth forecasts for next year from 1.3 per cent to 1 per cent.

Even with a swift resolution to the conflict, Niesr said the UK economy will be around £35billion smaller in 2026 and 2027, casting uncertainty over the Chancellor's ambitions to grow the UK economy.

Under the adverse scenario, growth would be just 0.7 per cent this year and 0.8 per cent next year, costing the UK a total of £68billion in lost output compared with its February forecast.

Aikman said: '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.'

And Stephen Millard, deputy director for macroeconomics at Niesr, said: 'The UK economy is facing a renewed period of instability and subdued growth following recent geopolitical shocks in the Middle East. 

'These events have forced significant downward revisions to growth forecasts while pushing inflation and interest rate expectations higher.'