Britain could be set to return to recession this year, according to some predictions, as rising unemployment, high taxes and massive instability caused by the war in Iran, drive higher inflation and suppress business confidence.
For Sir Keir Starmer’s administration, the narrative of “growth, growth, growth” which was faltering even before conflict in the Middle East, the impact of surging oil prices have hit home. The escalating conflict in Iran and a prolonged closure of the Strait of Hormuz will leave the UK economy teetering on the brink of going into recession.
In a stark revision to their previous prediction, the Item Club has dramatically downgraded its GDP growth forecast for the year, slashing expectations from 1.4 per cent to a mere 0.7 per cent.
This stagnation is expected to manifest as a flatlining of the economy across the second and third quarters, creating a summer of discontent for a government already struggling to protect a narrative of change and economic growth.
At the heart of this downturn is a classic oil shock, reminiscent of the 1970s, but filtered through the complexities of modern global trade.
The uncertainty surrounding the Strait of Hormuz, a vital artery for the world’s energy supply, has caused energy costs to spiral uncontrollably.
For the UK, which remains highly sensitive to fluctuations in wholesale gas and oil prices, the impact has been immediate. Supply chains are once again being disrupted, leading to an increase in costs for basic goods, everything from the food in the shops to filling up at a petrol station.
This volatility is not merely a domestic concern; the International Monetary Fund has issued a chilling warning that the current trajectory of Donald Trump’s “war on Iran” could trigger a global recession. Within this global framework, the UK is positioned as particularly vulnerable, facing the sharpest economic downgrade in the G7 as it already has some of the highest energy costs and has seen tax rises and additional regulation being placed on businesses since 2024.
The policy analysis suggests that the government’s fiscal headroom has essentially evaporated. Inflation, which many hoped had been tamed, is now forecast to surge to nearly 4 per cent, double the Bank of England’s 2 per cent target.
Under normal circumstances, such a spike might trigger an aggressive hike in interest rates, but the central bank finds itself in a paradoxical bind. Because current policy is already considered highly restrictive, the Bank is expected to keep rates steady, fearing that a further hike would further hit growth and could push the UK into recession.
This wait and see approach leaves the British public caught between the hammer of high prices and the anvil of high borrowing costs. The ripple effects are already evident in the aviation sector, which is grappling with an airline fuel cost crisis that threatens to make international travel a luxury reserved for the few.
The human cost of these macroeconomic shifts is becoming increasingly visible in the latest employment data. Economic reporting now forecasts that unemployment will hit 5.8 per cent by mid-2027, an increase that would add roughly 250,000 people to the jobless count.
This would represent the most significant hit to the UK labour market since the height of the COVID-19 pandemic. Such a spike in unemployment, combined with the erosion of real wages by 4 per cent inflation, will also hit consumer confidence. Current sentiment levels are at their lowest point since 2023, as households batten down the hatches in anticipation of a cold economic winter.
The corporate sector is reflecting this anxiety; profit warnings are rising across the FTSE 250, with many boards explicitly citing geopolitical uncertainty and the fear of a wider Middle Eastern conflagration as their primary concerns.
For the Starmer government, the timing could not be more treacherous. Elected to get the economy growing, the prospect of a recession will challenge the wisdom of big hikes in business tax rates and tougher regulations over the last 18 months.
This political fallout is already being measured in the polls, where the public’s patience with “external factors” is wearing thin, after all, these are similar lines to those used by previous administrations, whether following the impact of the 2008 financial crisis or the more recent Covid pandemic. Coupled with the ongoing Mandelson scandal and elections across the UK, the next few months look set to be the most difficult of Starmer’s time in office.
