Iran war will increase inflation and unemployment

The spiralling conflict in the Middle East will lead to higher inflation and rising unemployment, the British Chambers of Commerce (BCC) has forecast.

In what is the first economic assessment by a business organisation since last week's Spring Statement and the first to take account of the conflict in the Middle East, the BCC has warned it could change the economic outlook considerably.

In particular, it has revised down its GDP growth forecast for 2026 from 1.2% to 1.0%, with growth of 1.3% forecast in 2027, and 1.1% in 2028.

The increased global uncertainty is expected to push UK inflation higher than expected, reaching 2.7%, before easing to 1.9% in 2027, the BCC also said.

Moreover, unemployment is expected to increase to 5.5% in 2026 (up from 5.1% in the previous forecast), and stay at that rate through 2027, because of persistent high labour costs and hiring uncertainty.

The business body also predicted that the Bank of England will now keep interest rates at 3.75% this year, before cuts to 3.25% by the end of 2027.

Exports are projected to grow by just 0.7% in 2026 (down from 1.8% in the last forecast), as global uncertainty hits UK trade, the BCC added.

On unemployment in particular, the BCC said it now expects the unemployment rate to remain elevated at 5.5% through next year as well, before easing to 5.3% in 2028.

Youth unemployment will remain an area of concern as labour costs and AI erode entry level jobs. It is expected to be 17% in 2026, peaking at 17.1% in 2027 before falling to 16.7% in 2028, the BCC said.

David Bharier, BCC head of research, said: "The UK economy remains stuck in a low-growth pattern. Our forecast of just 1% growth in 2026 reflects weak productivity, subdued investment and cautious consumer spending.

"The recent escalation of conflict in Iran risks interrupting progress made on inflation. Higher energy prices linked to it could keep inflation firmly above the 2% target and lead the Bank of England to hold the interest rate longer than expected.

"Much depends on the duration of the conflict. Covid supply shutdowns showed how sudden stops put long term damage into the trading system.

"At the same time, elevated labour costs, stemming from national insurance increases and new employment regulations could weigh on hiring decisions. That has the potential to push the unemployment rate higher, making it especially difficult for younger people to enter the jobs market."

Bharier added: "Looking further ahead, our research shows that firms are increasingly adopting AI tools. While the immediate impact on employment is likely to remain limited, deeper integration could reshape the labour market more fundamentally. At the same time, it could offer an important opportunity to lift the UK's persistently weak productivity growth over the longer term."