Britain is anticipating a prolonged period of sluggish economic growth and a significant increase in unemployment, reaching over two million people, according to a new report from the ITEM Club. Economists at the forecasting body have raised concerns about the detrimental effects of ongoing disruption and escalating energy prices stemming from renewed conflict in the Middle East.
The ITEM Club, which utilizes the Treasury's economic model for its analyses, projects that UK economic growth will decelerate from 1.3 percent in 2025 to 0.9 percent in the current year and further to 0.7 percent in 2027. Inflation is expected to climb to 3.5 percent later this year, while unemployment is forecast to rise to 5.7 percent, indicating an addition of approximately 200,000 individuals to the unemployment rolls.
This outlook suggests a more gradual but extended economic slowdown compared to the ITEM Club's prior spring report. At that time, with conflict already active in the Middle East, the club had predicted a sharper contraction of 0.7 percent growth for the current year, followed by a recovery to 0.9 percent in 2027.
The report noted that a recent ceasefire had initially reduced the likelihood of the most severe economic scenarios. However, this ceasefire has since weakened, leading to a renewed increase in energy prices and causing further disruptions to shipping routes through the Strait of Hormuz.
The resumption of hostilities between the United States and Iran last week saw oil prices approach $100 a barrel. This surge has already contributed to higher petrol prices and heightened inflation concerns, fueling expectations of interest rate increases and consequently raising UK borrowing costs.
These increased borrowing costs, coupled with weaker economic growth, are expected to present significant fiscal challenges for the new Chancellor, John Healey, in his upcoming budget. He will also need to allocate funds for Prime Minister Andy Burnham's proposed spending initiatives, which include measures for energy bills, council housing, and bus fares.
Matt Swannell, chief economic adviser to the ITEM Club, stated that the growth outlook for the coming year is likely to be challenging. He added that higher energy prices are intensifying 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," Swannell said.