Unemployment to peak at 5.8 per cent as jobs market faces ‘biggest hit’ since pandemic
Britain is set to be “pushed to the brink of a technical recession” in the coming year as the economic fallout of the war in Iran dampens growth prospects and sends unemployment soaring.
The latest Item Club report sees the UK economy flatlining in the second and third quarters as it digests the consequences of the conflict in the Middle East. This is forecast to tee the UK up for 0.7 per cent growth in 2026 – a mere half of the 1.4 per cent notched the previous year.
The heightened energy prices from the war are also set to deliver the “biggest hit since the pandemic” to the jobs market. The independent forecasting group projects the UK’s jobless rate will peak at 5.8 per cent by the middle of 2027, with almost 250,000 left out of a job.
The latest figures for the unemployment rate came in at 5.2 per cent, with the Office for National Statistics (ONS) scheduled to release its next update on Tuesday.
Businesses have been left to deal with soaring energy prices after oil spiked as high as $118 throughout the conflict. This was mainly driven by the closure of the Strait of Hormuz – a narrow waterway through which around the fifth of the world’s global supply flows.
Rachel Reeves has said the long-promised British Industrial Competitiveness Scheme (BICS) would be expanded to cover 10,000 companies, up from the 7,000 originally announced, in a bid to mitigate the energy blow for business.
But the scheme, which the government claims will slash companies’ bills by up to 25 per cent, will not kick into action until next year. But Reeves did add support would be backdated to this month.
Inflation to near double Bank’s target
Matt Swannell, chief economic adviser to the Item Club, said: “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 companies’ investment plans.”
The gloomy report comes amid a dampening economic backdrop after the International Monetary Fund (IMF) handed Britain the biggest growth downgrade of any G7 country earlier this week.
Growth was slashed by 0.5 percentage points following the turmoil in the Middle East, which has left energy prices elevated.
Last week, fresh figures from the Office for National Statistics (ONS) showed the UK economy grew 0.5 per cent ahead of the war – much higher than expectations. But City economists quickly labelled the spurt “too good to be true“.
Item Club projected that inflation would tip above almost four per cent in the second half of 2026, in a major blow to hopes of interest rate cuts. This would mark nearly double the Bank of England’s two per cent target.
“We don’t expect the Bank of England to repeat the 2022 playbook and hike interest rates as energy prices rise,” Swannell said.
“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 can stand pat as it waits for inflation to fall back before it cuts interest rates a couple more times in the middle of next year.”