The conflict in Iran risks sending the unemployment rate even higher, leaving more than 100,000 Britons out of work within months, economists warn.
A prolonged conflict is likely to trigger another bout of inflation, disrupt supply chains, and delay interest rate cuts.
Higher energy prices ‘will likely add to the recent rise in unemployment’ too, according to James Smith, UK economist at investment bank ING, as businesses offset higher costs with job cuts or hiring freezes.
The country is already facing a jobs crisis, with the unemployment rate – at 5.2 per cent – its highest level since the pandemic.
Martin Beck, chief economist at WPI Strategy, said if cost-of-living pressures increase and rate cuts are pushed further into the future, ‘growth and employment would likely suffer’.
The Iran war could push UK unemployment to 5.5%, pushing 100,000 more people out of work
The conflict has caused one of the biggest disruptions to oil supply, with prices rising above $100 per barrel.
The UK is more exposed to higher prices because it imports most of its energy.
Smith told The Telegraph he anticipates unemployment rising above 5.5 per cent if the conflict lasts three months, in line with recent forecasts by business group the British Chambers of Commerce.
It would mark the highest rate since 2015 and mean more than 100,000 Britons would be pushed out of work, bringing the total number of unemployed close to two million.
Businesses are already sounding the alarm over the impact of the conflict on consumer sentiment and their cost base.
Manufacturers are suffering a ‘collapse’ in demand and rising costs, with recruitment lagging behind expectations, according to trade body Make UK.
It warned higher energy prices, which are rising after a spike in oil prices, and employment costs are holding back growth.
Meanwhile, household sentiment has slumped to a 14-month low in the ‘first concrete signs of the war… damaging the UK economy.’
An S&P Global report found that households are the most downbeat about their own finances since December 2023, and cutting back on spending.
It comes just days after GDP figures showed weaker-than-expected growth in January, before the start of the conflict.
The economy recorded zero growth, underscoring the economy’s fragility even before the outbreak of the war.
The prospect of another energy crisis has stoked fears that the UK will fall into a period of stagflation – the combination of higher inflation and unemployment, and stagnating growth – which has further dampened the chances of rate cuts.
The Bank of England will meet this week and is expected to hold interest rates, but some traders are betting on the central bank raising rates at some point this year.
Swaps pricing suggests that the Monetary Policy Committee will hike interest rates by 25bp once in 2026, a change from the expectation of two cuts as recently as the end of February.
Weaker growth and a fragile labour market will mean the central bank ‘faces an uncomfortable trade-off,’ said Deutsche Bank.
‘This is not 2022. The MPC will need to navigate these trade-offs carefully to avoid dragging the UK into a more protracted downturn.’
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