Britain is to “flirt” with recession and unemployment will be sent soaring amid the fallout of the Iran war, according to economic forecasters.
The latest Item Club report predicts the economy will flatline in the second and third quarters, which will leave gross domestic product (GDP) rising by 0.7% over the year as a whole, down from 1.4% expansion in 2025.
While the economy will “flirt with recession” – defined as two quarters or more in a row of falling GDP – it will also see higher oil and energy prices weigh on activity and the jobs market suffer its “biggest hit since the pandemic”, the Item Club warned.
But it predicted that interest rates will remain on hold throughout 2026 despite soaring inflation caused by the war.
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 independent forecasting group said the UK’s jobless rate will peak at 5.8% by the middle of 2027, with almost 250,000 more people without a job.
It follows a gloomy economic outlook report from the International Monetary Fund (IMF) last week showing the UK facing the biggest downgrade to growth among the G7 group of countries, with 0.8% forecast for 2026, down sharply from the 1.3% predicted in January.
But recent figures showed the UK economy had stronger-than-first thought momentum before the Iran war impact, with data showing GDP grew by 0.5% month-on-month in February – the fastest expansion since January 2024.
The Item Club said inflation is set to soar to almost 4% in the second half of 2026 – nearly double the Bank’s 2% target – but that Monetary Policy Committee (MPC) policymakers will hold off from knee-jerk hikes to interest rates.
Mr Swannell said: “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 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.”