UK growth downgraded as firms measure hit from Iran turmoil
The UK economy will suffer from sluggish growth this year, a leading industry body has warned, with further tax rises on the horizon remaining as a “risk”.
Business chiefs have warned that the services sector is set to keep the UK economy afloat this year, with contractions expected to come across construction and manufacturing.
The British Chambers of Commerce revised its growth forecast for this year down to one per cent from a previous prediction of 1.2 per cent.
Economists predicted the UK economy to inch back up to 1.3 per cent in 2027 and 1.1 per cent in 2028, far lower than the Office for Budget Responsibility (OBR)’s optimistic projections of 1.6 per cent for either year.
The outlook on inflation also worsened, with CPI inflation set to be 2.7 per cent at the end of 2026 despite previous hopes the Bank of England’s two per cent target rate would have been hit.
David Bharier, head of research at the BCC said the risks around the war in Iran were “interrupting progress” on inflation.
“Higher energy prices linked to it could keep inflation firmly above the two per cent target and lead the Bank of England to hold the interest rate longer than expected,” Bharier said.
“Much depends on the duration of the conflict. Covid supply shutdowns showed how sudden stops put long term damage into the trading system.”
UK growth to stagger amid low household spending
Firms are scrambling to measure hits to their revenue as the war in the Middle East drags on.
The BCC, which recently opened an ‘advisory hub’ body in partnership with the government on affairs relating to foreign economies, said export growth would slow to 0.7 per cent his year.
The downgrade was more than half that previously predicted as the new figure reflected “deepening global uncertainty”. Import growth is also set to slow down due to weakened consumer demand and a depreciation in the pound sterling.
Vicky Pryce, the chair of the BCC’s economic advisory council, warned that a rise in unemployment to 5.5 per cent this year would be a “worrying drumbeat” throughout 2026.
“That will have a widespread economic impact, hitting consumer and household spending and potentially also the housing market,” Pryce added.
Business chiefs warned that pessimistic forecasts mean there was a “risk of further consolidation” before the next general election, suggesting that Rachel Reeves may have to announce fresh tax hikes and spending cuts to meet her fiscal rules.
The Chancellor is scrambling to contain the effects of the energy supply crisis in the Middle East, with the government hoping a fall in energy bills from April can be maintained in June.
Reeves met with G7 finance ministers and executives at the International Energy Agency on Monday to co-ordinate a response to the crisis.
Traders bet that borrowing costs would remain higher for longer, leaving public finances in a more precarious position.