Britain to ‘flirt with recession’ this summer amid turmoil over Iran

A doom-laden report has predicted that the economy will flatline for six months – with no growth in the second and third quarters of this year.

The forecasting group EY Item Club also warned that an energy price ‘shock’ will soon drive inflation to almost 4 per cent, while unemployment will hit 5.8 per cent in mid-2027.

That would leave an extra 250,000 people out of work – the highest level since 2014 and even worse than during the pandemic.

The report makes grim reading for the Prime Minister and Chancellor Rachel Reeves after the International Monetary Fund (IMF) last week warned Britain will be hit harder by the Iran war than any other major developed economy.

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 firms’ investment plans.’ 

He warned that the recent spike in energy price and disruption to supply chains ‘will be the biggest jolt to the jobs market since the pandemic’.

And he added: ‘It’s inevitable that inflation is going to pick up this year. Households’ utility and petrol bills will spike, and businesses are going to put up prices as their costs rise.’

Official figures last week suggested the economy had been in better shape than feared before the war – with output rising by a surprising 0.5 per cent in February.

But the Item Club report said ‘ongoing data issues’ meant the figures were ‘overstated’ and that the UK is set to ‘flirt with recession in the middle of the year’.

It pencilled in growth of just 0.7 per cent across the whole of 2026 before ‘a still below-par’ 0.9 per cent in 2027.

That is even more gloomy than the IMF’s prediction. Last week it slashed its UK growth forecast for this year by 0.5 percentage points to 0.8 per cent. This was the

biggest downgrade in the G7 nations, with the US, Canada, Germany, France, Italy and Japan all seen as more capable of withstanding the energy shock.

The IMF also trimmed its forecast for 2027 by 0.2 percentage points to 1.3 per cent.

But in a boost to millions of borrowers, the Item Club said it expects the Bank of England to resist pressure to raise interest rates this year, despite much higher inflation. 

‘We don’t expect the Bank of England to repeat the 2022 playbook and hike interest rates as energy prices rise,’ said Mr Swannell.

‘A more fragile economy means that businesses will find it harder to pass on higher costs to the consumer.

‘Instead, the Bank can stand pat as it waits for inflation to fall back before it cuts interest rates a couple of more times in the middle of next year.’