Britain’s economic outlook has weakened sharply, with forecasts suggesting the country is close to a period of stagnation. Rising energy costs linked to the conflict in Iran are expected to weigh heavily on growth and employment. The latest projections indicate that while a formal recession may be avoided, the economy will struggle to maintain momentum. Analysts point to a combination of geopolitical disruption, inflationary pressure and declining business confidence as key factors shaping the outlook.
Oil Shock and Geopolitical Tensions Weigh on Growth
The UK economy is forecast to “flirt” with recession during the middle of the year, with output expected to flatline across the second and third quarters. According to the EY Item Club, this would leave annual GDP growth at 0.7%, a marked slowdown from the 1.4% recorded previously.
The deterioration is closely tied to the impact of the Iran conflict on global energy markets. Disruptions to oil and gas flows through the Strait of Hormuz have pushed up prices, with Brent crude reaching around $95 a barrel in recent trading, according to Sky News. Although this remains below earlier peaks, the persistence of supply constraints is still affecting global markets.
Higher energy costs are expected to feed through supply chains, raising costs for businesses and reducing household spending power. According to reports, forecasters warn that spiralling energy prices and supply chain disruption will push the UK to the brink of a technical recession, defined as two consecutive quarters of falling output.
Recent economic data had suggested some resilience prior to the escalation of the conflict. Official figures showed GDP grew by 0.5% in February, the fastest monthly increase in over a year. Yet analysts suggest this momentum is unlikely to be sustained under current conditions.
International institutions have also revised their outlooks. The International Monetary Fund has warned that the global economic outlook has “abruptly darkened” due to the conflict, with the UK facing one of the largest growth downgrades among G7 economies.
Labour Market Strain and Cautious Policy Response
The slowdown is expected to have a pronounced effect on employment. Forecasts suggest that nearly 250,000 additional people could become unemployed, pushing the jobless rate to around 5.8% by mid-2027. According to The Guardian, this would represent the most significant hit to the labour market since the pandemic.
Business sentiment has already deteriorated. A survey by Deloitte found that chief financial officers are increasingly pessimistic, with confidence levels falling sharply in recent months. Many firms are scaling back investment and hiring plans, prioritising cost control and cash preservation in response to uncertainty.
These trends reflect broader concerns about rising input costs, inflation and geopolitical risk. Finance leaders identified energy prices and inflation as among the most significant threats to their operations, alongside wider instability linked to global events.
Inflation in the UK is projected to rise to around 4% in the second half of 2026, nearly double the Bank of England’s target. Despite this, policymakers are not expected to respond with immediate interest rate increases. According to the EY Item Club, the current level of rates is already considered restrictive, reducing the need for further tightening.
Instead, the Bank of England is expected to maintain its current stance while monitoring developments. Analysts suggest that weaker demand and constrained pricing power may limit the extent to which businesses can pass on higher costs to consumers. Taken together, the forecasts present a picture of an economy under strain from external shocks, with limited room for policy intervention in the short term.
