Economic outlook ‘highly uncertain’ after ‘shock’ of Gulf conflict, expert warns

The inflationary impact that the conflict in the Middle East will have on both consumers and public finances will likely outweigh the benefits to Scotland’s oil and gas sector from higher prices, a report has indicated.

Experts from the Fraser of Allander Institute think tank considered the impact the current conflict in the Gulf could have in their latest economic commentary.

FAI director Mairi Spowage said the conflict there “reminds us how quickly geopolitical risk can translate into economic pressure, particularly through energy markets”.

And while the expert stressed a downturn is not inevitable, Ms Spowage said there was a need for “caution”.

Her comments came as the FAI, which is based at Strathclyde University in Glasgow, downgraded its forecast for GDP growth for Scotland for 2026, from 1.1% to 0.9%.

Despite this, it still expects Scotland’s economy to see positive growth, with predictions for increases of 1% and 1.1% in 2027 and 2028 respectively.

But the report noted that the “heightened conflict in the Middle East in early 2026 — particularly around Iran and key shipping routes like the Strait of Hormuz — has pushed global oil and gas prices sharply higher”.

This, the report added, is “feeding through into higher UK energy costs and inflation”.

The commentary said: “For Scotland, this cuts both ways: as part of the UK, higher fuel and heating costs squeeze households and businesses, raising living costs and dampening growth, while North Sea producers may see short-term revenue gains from higher prices.

“Overall, however, Scotland remains a net price-taker of global energy markets, so the inflationary impact on consumers and public finances is likely to outweigh the localised benefits to the oil and gas sector.”

With the outlook “increasingly uncertain” as the economy adjusts to the recent surge in oil and gas prices, the FAI warned there could be consequences for employment.

Warning that higher energy costs are “likely to raise firms’ operating expenses and compress margins”, the report added: “In this environment – particularly if price pressures are expected to persist – firms may delay or scale back hiring while awaiting greater conditions.”

Speaking about the conflict in the Middle East, Ms Spowage said: “At a time when UK inflation had begun to stabilise and the economy was showing signs of recovery after several challenging years, this renewed shock means the outlook remains highly uncertain, with many of the potential impacts yet to be fully reflected in the data.”

She recalled how Russia’s invasion of Ukraine in 2022 had shown “how prolonged disruption to oil and gas markets can drive inflationary pressures, tighten financial conditions, and ultimately weigh on economic growth”.

Ms Spowage concluded: “The lesson for Scotland is not that a downturn is inevitable, but that today’s positive outlook must be approached with caution.”

With the commentary published in the run-up to May’s Holyrood election, Angela Mitchell, practice senior partner for Scotland and Northern Ireland at Deloitte, told how “changes in parliamentary representation can create scope for a shift in emphasis and approach”.

Ms Mitchell added: “This period, therefore, provides an opportunity to reassess priorities and to focus more sharply on delivery.”

She continued: “No matter who is in government, choices around public spending, economic reform  and investment frameworks will influence both near-term conditions and  longer-term performance.

“The interaction between fiscal constraints and policy  ambition will be a defining feature of this next political chapter in Scotland.”