Iran war: UK to ‘flirt’ with recession and 250,000 to lose jobs amid fallout, warn forecasters
Economic forecasters have warned that unemployment is set to soar as the impact of ongoing conflict in Iran and the UK economy is set to “flirt” with recession.
A new report predicts the UK economy will remain flat in the second and third quarters of this year and remain on the verge of a technical recession, defined as two consecutive quarters of GDP falling.
The latest Item Club report predicted a modest 0.7 percent increase in gross domestic product (GDP) for the full year; This is a significant decrease from the initial forecast of 1.4 percent expansion for 2025.
This comes just days after the International Monetary Fund (IMF) warned that Donald Trump’s war on Iran risks triggering a global recession in a devastating assessment of the conflict’s impact on the world economy.
Item Club said high oil and energy prices will suppress activity and the employment market will endure the “biggest hit since the pandemic.”
The report predicts that the unemployment rate in the UK will reach 5.8 percent by mid-2027, resulting in approximately 250,000 more people being unemployed.
Matt Swannell, chief economic adviser at the Item Club, said: “Rolling energy costs and disruptions to supply chains will push the UK to the brink of a technical recession by the middle of this year.
“Consumers’ spending power will be squeezed, while more expensive financing arrangements and a more uncertain global economic environment will pour cold water on companies’ investment plans.”
Following reports over the weekend that Iranian forces were refusing passage through the key trade route, President Donald Trump issued new threats to Iran if a deal around the Strait of Hormuz is not reached.
The IMF said the international outlook had “suddenly darkened” as a result of the war, which threatened to throw the global economy “off course” and could cause an energy crisis on an unprecedented scale.
Last week, it was highlighted that the UK faces the biggest growth rating among the G7 countries, with a forecast of 0.8 percent for 2026, a sharp drop from the 1.3 percent forecast in January.
However, recent data has pointed to stronger economic momentum than expected before the full impact of the Iran conflict; GDP increased by 0.5 percent monthly in February; This was the fastest growth since January 2024.
Although inflation is forecast to rise to almost 4 per cent in the second half of 2026 – almost double the Bank of England’s 2 per cent target – the report suggests interest rates will remain unchanged throughout 2026.
The Monetary Policy Committee (PPC) is expected to resist sudden interest rate increases.
Mr Swannell added: “We don’t expect the Bank of England to repeat its 2022 playbook and raise interest rates as energy prices rise. This time policy is already restrictive and a more fragile economy means it will be harder for businesses to pass on higher costs to consumers.”
“Instead, the MPC may continue to hold out as it waits for inflation to fall before cutting interest rates several more times in the middle of next year.”
