Britain is facing rising UK recession risk as the economic fallout from the Iran war threatens to push the country to the brink of contraction, with up to 250,000 jobs potentially lost by mid-2027. The warning comes as Chancellor Rachel Reeves convenes emergency talks with leading bank executives to contain the impact of surging energy prices and weakening business confidence.
New analysis from the EY Item Club and Deloitte highlights the growing pressure on the UK economy following escalating tensions in the Middle East, including the closure of the Strait of Hormuz and disruption to global oil and gas supplies.
Energy shock pushes UK towards recession
Economists warn that soaring energy costs and supply chain disruption triggered by the Iran conflict could deliver the biggest economic blow to the UK since the COVID-19 pandemic. The Strait of Hormuz, a critical global energy route, handles a significant share of the world’s oil and gas shipments, making any disruption a major risk to global markets.
The EY Item Club forecasts that UK economic growth will stall in the second and third quarters of the year, placing the country at risk of a technical recession, defined as two consecutive quarters of contraction. Growth is expected to slow sharply, dropping from 1.4% to just 0.7%, reversing earlier signs of recovery.
Matt Swannell, chief economic adviser at the forecast group, said rising energy prices and global uncertainty are squeezing household incomes and discouraging business investment. He added that weaker consumer spending and higher borrowing costs are likely to compound the slowdown.
Jobs at risk as businesses cut back
The deteriorating outlook is expected to hit employment, with unemployment projected to rise to 5.8% by mid-2027, up from the current 5.2%. This could translate into nearly 250,000 additional job losses as companies respond to mounting cost pressures and reduced demand.
Businesses are already adjusting their strategies. According to Deloitte’s latest CFO survey, finance leaders across major UK firms have become significantly more pessimistic, with confidence levels dropping to their lowest point since the pandemic.
Chief financial officers cited geopolitical instability, rising energy costs, inflation, and interest rates as their top concerns. Many companies are shifting to defensive strategies, prioritising cost control and cash preservation while scaling back hiring and investment plans.
Ian Stewart, chief economist at Deloitte UK, said companies are focusing on strengthening balance sheets in response to growing external risks. He noted that reduced capital spending and cautious hiring are likely to weigh further on economic growth.
Inflation pressures and policy challenges
The energy shock is also expected to drive inflation higher, with forecasts suggesting it could approach 4% in the second half of 2026—well above the Bank of England’s 2% target. Despite this, policymakers may hesitate to raise interest rates aggressively, given the fragile state of the economy.
The International Monetary Fund has already downgraded the UK’s growth outlook, predicting expansion of just 0.8% in 2026, down from earlier estimates. This marks one of the sharpest downward revisions among G7 economies, reflecting the UK’s vulnerability to global shocks.
Government response and financial sector involvement
In response to the mounting risks, Chancellor Rachel Reeves has called on major UK banks to help mitigate the impact on households and businesses. Discussions are expected to focus on supporting borrowers facing rising mortgage costs and ensuring financial stability during a period of heightened uncertainty.
The government is particularly concerned about the ripple effects of higher energy prices on inflation, borrowing costs, and consumer confidence. Analysts warn that without targeted support measures, the economic shock could deepen, prolonging the slowdown.
Global conflict and economic vulnerability
The current crisis underscores the UK’s exposure to global energy markets and geopolitical tensions. The Iran war has disrupted supply chains and driven up oil prices, echoing previous energy crises that have had widespread economic consequences.
Unlike the 2022 energy crisis triggered by Russia’s invasion of Ukraine, the current shock is compounded by broader geopolitical instability and fragile post-pandemic recovery conditions. The UK’s reliance on imported energy and its interconnected financial system make it particularly sensitive to such disruptions.
At the same time, rising concerns about cyber threats linked to geopolitical conflicts add another layer of risk for businesses, further dampening investment and growth prospects.
As the situation evolves, policymakers and industry leaders face increasing pressure to navigate a complex economic landscape, balancing the need for stability with the challenges posed by external shocks.