The UK economy is expected to lose 163,000 jobs in 2026 as rising energy prices, supply chain disruption and weaker consumer spending begin to affect businesses across the country. Lower-income regions dependent on manufacturing and construction are forecast to face the sharpest impact.
According to the Item Club’s latest regional outlook, employment is projected to decline by 0.4% this year, with South Wales and the Humber identified as among the most exposed areas due to higher industrial costs linked to the conflict in the Middle East.
The warning comes as the Government faces growing pressure over the state of the economy despite recent figures showing modest growth and lower borrowing levels earlier this year. Analysts have pointed to mounting costs for employers and households, alongside uncertainty created by rising global oil prices and disruption to shipping routes.
The report also highlights widening regional inequalities, with lower-income households expected to face steeper increases in living costs because a larger share of their income is spent on essentials such as food and energy.
Manufacturing Regions Expected to Suffer the Heaviest Losses
According to the Item Club, South Wales is forecast to lose 5,700 jobs during 2026, while the Humber could see employment fall by 2,800 positions. Both regions rely heavily on manufacturing and construction sectors, which are facing higher fuel, materials and energy costs following the escalation of tensions involving Iran.
Tim Lyne, economic adviser to the Item Club, said manufacturing businesses were already reducing headcount as operational costs continue to rise. He also noted that supply chain disruption linked to instability in the Middle East was adding further pressure on firms already struggling with weaker demand.
The report suggests the slowdown will extend beyond industrial regions. London is expected to lose around 25,000 jobs this year as retail and hospitality activity weakens. Birmingham could lose 12,500 jobs, while Leeds and Glasgow are forecast to shed 9,800 and 6,200 jobs respectively.
According to the Bank of England’s more pessimistic scenario published last month, UK unemployment could rise to 5.6% this year, compared with the current level of 5.2%. The central bank warned that prolonged disruption to energy markets and global trade could feed through into employment and consumer confidence over the coming months.
Some areas are expected to remain more resilient. The Item Club said Cambridge could see employment growth because of the strength of its technology sector, while Belfast and Edinburgh are projected to experience comparatively smaller losses.
Rising Living Costs Deepen Regional Economic Divide
The report also warned that the economic fallout from the Iran conflict could widen existing disparities in living standards across Britain. According to the Item Club, households in lower-income cities spend a significantly larger share of disposable income on energy and food than those in wealthier areas.
In cities including Newcastle, Belfast and Birmingham, households spend as much as 13% of disposable income on essentials such as fuel and food. By comparison, the average London household spends less than 9%, according to the report.
Mr Lyne said consumers in lower-income regions generally have fewer savings available to absorb rising costs, which could result in reduced spending across retail and hospitality sectors. That decline in discretionary spending is expected to contribute further to job losses over the year.
A Government spokesperson said recent labour market figures showed unemployment had fallen below 5% earlier this year, with 332,000 more people in work than a year ago. The spokesperson also acknowledged that the conflict in the Middle East was likely to affect prices and employment in the months ahead.
According to the Government, support measures include plans to reduce energy bills for manufacturers as part of wider efforts to limit the impact of higher global energy costs on British businesses and households.
