UK Economy Faces Prolonged Weak Growth and Rising Unemployment, Report Warns

The United Kingdom is poised for an extended period of sluggish economic growth and a significant increase in unemployment, according to a new report from economists at the ITEM Club. The forecasting body warns that renewed conflict in the Middle East has disrupted supply chains and driven up energy prices, contributing to a bleaker economic forecast than previously anticipated.

ITEM Club economists project that UK growth will decelerate from 1.3% in 2025 to 0.9% in the current year, with a further slowdown to 0.7% expected in 2027. Inflation is forecast to reach 3.5% later this year, and unemployment is predicted to rise to 5.7%, translating to an additional 200,000 individuals seeking work.

"The recent ceasefire had reduced the likelihood of some of the worst-case economic scenarios," the report stated. "However, the ceasefire has since frayed, pushing energy prices higher again and causing renewed disruption to shipping through the Strait of Hormuz."

The resumption of hostilities between the US and Iran last week caused oil prices to approach $100 a barrel. This surge has already led to higher petrol prices and ignited inflation concerns, subsequently fueling expectations of interest rate hikes and increasing UK borrowing costs.

These elevated borrowing costs, coupled with decelerating economic growth, will present challenges for new Chancellor John Healey as he prepares his first budget. He must also allocate funds for Prime Minister Andy Burnham's key spending initiatives, including measures related to energy bills, council housing, and bus fares.

Matt Swannell, chief economic adviser to the ITEM Club, commented on the outlook. "The growth outlook over the next year or so is likely to be challenging," Swannell said. "Higher energy prices are adding to the pressure on households and businesses at a time when demand is already subdued. We expect a sustained period of weak growth, rather than a sudden downturn. The economy is going to move forward, but at a slower pace than we have seen over the last couple of years."