Economic Forecast Predicts Six Months of Stagnation and Rising Joblessness
A grim economic report from the forecasting group EY Item Club has projected that the UK economy will experience no growth for six consecutive months, flatlining during the second and third quarters of this year. The analysis paints a bleak picture for the nation's financial outlook, with significant implications for households and businesses alike.
Inflation and Unemployment Set to Surge
The report warns that an impending energy price 'shock' will drive inflation to almost 4 per cent in the near term. Furthermore, unemployment is forecast to reach 5.8 per cent by mid-2027, marking the highest level since 2014 and surpassing even the pandemic-era peaks. This increase would leave an additional 250,000 people out of work, exacerbating economic hardship across the country.
Matt Swannell, chief economic adviser to the Item Club, stated: 'Spiralling energy costs and disruption to supply chains will push the UK to the brink of a technical recession in the middle of this year. Consumers' spending power will be squeezed, while more expensive financing arrangements and a less certain global economic backdrop will pour cold water on firms' investment plans.'
Global Context and Comparative Weakness
This forecast follows a recent warning from the International Monetary Fund (IMF) that Britain will be hit harder by the Iran war than any other major developed economy. The Item Club's predictions are even more pessimistic than the IMF's, which last week reduced its UK growth forecast for this year by 0.5 percentage points to 0.8 per cent—the largest downgrade among G7 nations.
The report highlights that the United States, Canada, Germany, France, Italy, and Japan are all viewed as more resilient to the energy shock. For 2027, the Item Club pencils in growth of just 0.7 per cent across the entire year, followed by a 'still below-par' 0.9 per cent in 2027, compared to the IMF's trimmed forecast of 1.3 per cent.
Data Discrepancies and Recession Risks
Despite official figures last week suggesting the economy was in better shape than feared before the war—with output rising by 0.5 per cent in February—the Item Club report contends that 'ongoing data issues' mean these figures were 'overstated.' It asserts that the UK is set to 'flirt with recession in the middle of the year,' casting doubt on earlier optimistic assessments.
Swannell added: 'It's inevitable that inflation is going to pick up this year. Households' utility and petrol bills will spike, and businesses are going to put up prices as their costs rise.' He also warned that the recent spike in energy prices and supply chain disruptions 'will be the biggest jolt to the jobs market since the pandemic.'
Interest Rate Outlook and Monetary Policy
In a potential silver lining for millions of borrowers, the Item Club expects the Bank of England to resist pressure to raise interest rates this year, despite the surge in inflation. Swannell explained: 'We don't expect the Bank of England to repeat the 2022 playbook and hike interest rates as energy prices rise. A more fragile economy means that businesses will find it harder to pass on higher costs to the consumer.'
Instead, the report suggests the Bank will maintain current rates, waiting for inflation to subside before implementing a couple of additional cuts in the middle of next year. This stance aims to balance inflationary pressures with the need to support a weakening economy.
The findings present a challenging scenario for policymakers, including Prime Minister and Chancellor Rachel Reeves, as they navigate these economic headwinds and strive to mitigate the impact on British households and businesses.
