UK economy warned to flirt with recession as Iran conflict pushes oil prices higher

The UK economy is expected to come close to recession this year as a sharp rise in global oil prices driven by escalating tensions involving Iran places renewed pressure on inflation and household spending power, according to a leading independent forecast. The warning comes as energy markets react to instability in the Middle East, with disruptions to key shipping routes adding further uncertainty to global supply chains. Economists say the combined effect of higher fuel costs and weaker consumer demand could significantly slow economic growth across the country.

The latest report from the Item Club, which uses Treasury economic modelling, suggests that the UK is entering a fragile period of economic performance. Brent crude oil prices rose by around five percent in early trading, reaching approximately 95 dollars a barrel, as concerns grew over the security of the Strait of Hormuz, a critical global shipping route. The situation has been complicated by faltering diplomatic efforts and renewed regional tensions, which have contributed to volatility in global energy markets and uncertainty for import dependent economies such as the United Kingdom.

Economists behind the forecast warn that sustained high oil prices are likely to feed through into broader inflationary pressures over the coming months. Higher energy costs typically affect transport, manufacturing, and retail prices, reducing disposable income for households already facing cost of living challenges. The report estimates that UK economic growth could slow to just 0.7 percent this year, compared with 1.4 percent recorded previously, highlighting the extent of the expected economic slowdown as external shocks continue to weigh on domestic performance.

The labour market is also expected to feel the impact of weaker growth conditions, with projections suggesting a notable rise in unemployment. Analysts estimate that job losses could reach nearly 250,000 as businesses adjust to higher operational costs and reduced consumer spending. The unemployment rate is forecast to climb to 5.8 percent next year from the current level of around 5.2 percent, marking what the report describes as the most significant deterioration in employment conditions since the COVID pandemic period.

Despite the inflationary pressure caused by rising energy prices, the Item Club suggests that the Bank of England may not need to intervene aggressively in monetary policy. Economists argue that while inflation is expected to increase in the short term, the broader economic slowdown could limit the need for further interest rate hikes. However, the outlook remains highly uncertain, with global geopolitical developments continuing to play a central role in shaping economic conditions and market stability across the UK and wider international economy.