Unemployment is expected to rise above two million for the first time in more than a decade as the economic fallout from the Iran conflict pushes the UK towards a slowdown.
New forecasts suggest the jobless rate will climb from 5.2 percent to 5.8 percent next year, taking the number of people out of work from around 1.87 million to more than 2.1 million.
The projections come as rising energy costs and supply chain disruption place fresh pressure on employers, with businesses expected to cut jobs as costs increase and demand weakens.
The forecast comes from the ITEM Club, an independent economic forecasting group that uses the same model as HM Treasury.
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Energy costs and weak demand drive job losses
Matt Swannell, chief economic adviser to the ITEM Club, said the labour market would face its biggest shock in years due to rising costs and disruption. “The recent spike in energy prices and disruption to supply chains will be the biggest jolt to the jobs market since the pandemic.”
He said employers were likely to respond by reducing headcount. “Faced with higher costs and soft demand, we think businesses will reduce headcount, causing almost 250,000 more people to become unemployed.”
Economic growth is expected to stall in the middle of the year, with the UK at risk of a technical recession as higher operating costs and reduced consumer spending weigh on activity.
Separate research from consulting firm Deloitte suggests confidence among households has fallen sharply, with concerns rising around job security, income and future prospects.
Céline Fenech, a consumer insight executive at Deloitte, said households were under strain before the latest developments. “The impact of recent geopolitical events on the price of energy will likely feel like another setback for consumers.
“Many were already facing a squeeze on their household budgets at the start of the year with the slowing of wage growth and a cooling jobs market.”
Business pressure builds as investment slows
Companies are also facing mounting financial pressure, with higher borrowing costs and economic uncertainty expected to curb investment.
Consulting firm EY-Parthenon has reported an increase in profit warnings, reflecting growing strain on corporate earnings.
Jo Robinson, a partner at EY-Parthenon, said the Iran war would intensify existing challenges. “The war will overlap with existing business challenges and amplify the strain on earnings for some.”
As a result, firms are expected to delay hiring plans and reassess workforce needs, particularly in sectors exposed to energy costs and global trade.
At the same time, living standards are forecast to fall slightly this year as inflation continues to outpace wage growth, further dampening consumer demand.
Economic outlook
The forecasts present a challenge for Chancellor Rachel Reeves, who is seeking to manage the economic impact of the Middle East conflict while maintaining growth.
She is expected to meet senior executives from major banks, including Barclays, Lloyds Banking Group, NatWest Group, HSBC and Santander UK, to discuss the impact on businesses and households.
A Treasury spokesperson said the government was taking steps to support the economy in the face of external pressures.
“The war in Iran was not of our making but it is imposing costs on the UK economy. That is why we are taking the right, fair and necessary action to protect families and businesses,” the spokesperson said.
The UK economy had shown signs of recovery earlier in the year, with growth exceeding expectations in the three months to February. But the latest projections suggest that momentum could be short-lived as global instability feeds through to domestic conditions.
William Furney is a Managing Editor at Black and White Trading Ltd based in Kingston upon Hull, UK. He is a prolific author and contributor at Workplace Wellbeing Professional, with over 127 published posts covering HR, employee engagement, and workplace wellbeing topics. His writing focuses on contemporary employment issues including pension schemes, employee health, financial struggles affecting workers, and broader workplace trends.
- William Furney
- William Furney
- William Furney
- William Furney
