UK Economy to 'Flirt' with Recession as Iran War Fallout Threatens 250,000 Jobs
Britain's economy is set to "flirt" with recession, with unemployment predicted to soar by nearly 250,000, as the fallout from the ongoing conflict in Iran takes a severe toll, according to economic forecasters. A new report warns that the UK will hover on the brink of a technical recession, defined as two consecutive quarters of falling GDP, with the job market enduring its "biggest hit since the pandemic."
Economic Downgrade and Global Risks
The latest Item Club report predicts that the UK's economy will flatline across the second and third quarters of this year, resulting in a modest 0.7 per cent rise in gross domestic product (GDP) for the entire year. This marks a significant downgrade from the 1.4 per cent expansion initially forecast for 2025. The report comes just days after the International Monetary Fund (IMF) issued a damning assessment, warning that Donald Trump's war on Iran risks triggering a global recession and has "abruptly darkened" the international outlook.
Higher oil and energy prices are expected to stifle economic activity, with the Item Club anticipating that the UK's jobless rate will peak at 5.8 per cent by mid-2027, leading to nearly 250,000 more people out of work. 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."
Impact on Consumers and Businesses
Consumers' spending power will be squeezed, while more expensive financing arrangements and a less certain global economic backdrop will dampen companies' investment plans. President Donald Trump has issued further threats to Iran if a deal is not reached around the Strait of Hormuz, after reports that Iranian forces were refusing passage through this key trading route over the weekend. The IMF highlighted that the war threatens to throw the global economy "off course" and could cause an unprecedented energy crisis.
In a further blow, the IMF last week noted that the UK faces the largest growth downgrade among G7 nations, with a forecast of 0.8 per cent for 2026, sharply down from 1.3 per cent predicted in January. However, recent data indicated stronger-than-expected economic momentum before the full impact of the Iran conflict, with GDP growing by 0.5 per cent month-on-month in February – the fastest expansion since January 2024.
Inflation and Interest Rate Outlook
Despite inflation being projected to surge to almost 4 per cent in the latter half of 2026 – nearly double the Bank of England's 2 per cent target – the report suggests interest rates will remain unchanged throughout 2026. The Monetary Policy Committee (MPC) is expected to resist knee-jerk rate hikes. Mr Swannell added, "We don't expect the Bank of England to repeat the 2022 playbook and hike interest rates as energy prices rise. This time policy is already restrictive, and a more fragile economy means that businesses will find it harder to pass on higher costs to the consumer."
Instead, the MPC is likely to stand pat, waiting for inflation to fall back before cutting interest rates a couple more times in the middle of next year. This cautious approach reflects the delicate balance between controlling inflation and supporting an economy under strain from external shocks.
