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A quarter of a million people could lose their jobs by the middle of next year as Britain “flirts with recession”, analysis suggests, after business confidence was shattered by the US-Israel war on Iran.
As the chancellor, Rachel Reeves, summoned bank chiefs for talks aimed at containing the fallout, twin reports from top accounting firms underlined the scale of the economic threat facing the UK.
Iran’s retaliatory closure of the strait of Hormuz trade route and its strikes on its regional neighbours, which have sent oil and gas prices soaring, will cause the biggest economic hit since the pandemic, according to the EY Item Club, an economic forecast group.
A separate report by Deloitte found finance chiefs at big UK businesses were already reining in their spending plans, taking action that was likely to weigh on economic activity and hiring.
The EY Item Club said it expected the UK economy to flatline in the second and third quarters of this year as a result, leaving the country at risk of recession, defined as two successive quarters of contraction.
Growth is projected to halve from 1.4% in 2025 to 0.7% this year, choking off the gathering momentum that had been reflected in February’s better-than-expected rise in gross domestic product.
The EY Item Club also expects unemployment to hit 5.8% by the middle of 2027, up from the current five-year high of 5.2%, with almost 250,000 more people losing their jobs because of the crisis in the Middle East.
Matt Swannell, the forecast group’s chief economic adviser, 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 companies’ investment plans.”
The grim assessment followed a report from the International Monetary Fund last week that showed the UK faced the biggest growth downgrade among the G7 group of countries, with 0.8% forecast for 2026, down from the 1.3% the IMF predicted in January.
The Item Club expected inflation to rise to almost 4% in the second half of 2026 – nearly double the Bank of England’s 2% target – but also predicted policymakers on Threadneedle Street’s monetary policy committee would hold off from knee-jerk hikes in interest rates.
Executives in charge of the purse strings of British businesses are already more pessimistic than at any time since the start of the Covid-19 pandemic, according to a separate report from Deloitte.
Confidence among chief financial officers slumped to a net -57% between 16 and 30 March, down from -13% in the previous quarter, according to its CFO survey.
CFOs reported that geopolitical developments represented the greatest external risk to their businesses.
“Finance leaders are coping with high levels of external uncertainty and their focus is on managing risks from geopolitics, rising energy prices and higher financing costs,” said Ian Stewart, the chief economist at Deloitte UK.
When asked about the consequences of adverse geopolitical developments over the next three years, the top three concerns among CFOs were energy costs (61%), inflation and interest rates (61%) and an increase in cyber-attacks (60%).
The Iran crisis has had an immediate impact on energy costs, potentially feeding through into inflation and interest rates.
The US has also reported an increase in Iran-affiliated cyber-attacks on critical American infrastructure.
CFOs have reacted to rising risk with a shift to more defensive financial strategies, signalling lower spending plans that support EY’s assumptions about a slowdown in wider economic growth.
Cost control and building up cash are at the top of the priority list, while expectations for capital spending and hiring have flagged.
“Rarely in the last 16 years have UK CFOs been more focused on cost control than today,” said Stewart.
“This challenging environment is prompting CFOs to scale back expectations for margins and sharpen their focus on cost reduction and cash conservation. The immediate priority for finance leaders is to strengthen balance sheets in the face of external headwinds.”
