UK to 'flirt' with recession as Iran war oil shock bites, report warns

The UK economy will "flirt" with recession this year and almost 250,000 people could lose their jobs due to the effects of the Iran war oil price shock, according to a respected independent forecaster.

The Item Club, which uses Treasury economic modelling to produce its figures, released its latest report against a backdrop of further shifts in global oil costs due to events in the Middle East.

Brent crude, the international benchmark, was 5% up at $95 a barrel in Asian trading as the prospects for further US-Iran peace talks faltered amid a shaky ceasefire that has seen the key Strait of Hormuz shipping route closed again by Tehran.

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At that level, it's down on the highs near $120 seen last month but the longer oil and natural gas fail to flow through the strait, the greater the squeeze on global supplies becomes.

The Item Club said the price spike, which is already being seen widely through fuel prices, is anticipated to spread across supply chains in the months to come and harm spending power widely.

It sees UK economic growth of just 0.7% for this year - half the shaky 1.4% level achieved last year - with the jobs market enduring its "biggest hit" since the COVID pandemic, with the unemployment rate rising to 5.8% by next year from the current level of 5.2%.

But it predicts that the Bank of England will not have to intervene to help control the rising pace of price growth - inflation - despite forecasting a peak of 4% this year. The rate currently stands at 3%.

It adds the Bank rate is already restrictive enough, at its current level of 3.75%, across 2026.

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 companies' investment plans."

Its warnings around the chance of a recession, defined as two successive quarters of negative growth, go further than other downgrades to the UK's fortunes by major international bodies in recent weeks.

Nevertheless, both the OECD and International Monetary Fund said they see the UK economy taking the hardest hit among major industrialised nations, in their respective updates.

The Item Club released its report just days after official data showed a better than expected performance for growth in February.

The Iran war began on 28 February, choking off a fifth of the world's oil and gas supplies in the process.

Experts are widely warning that even if hostilities were to end immediately, the damage caused to energy infrastructure across Gulf states will stiltake years to fully recover to pre-conflict levels of output.

It threatens elevated bills, from fuel to food, for a long time to come.

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