Britain's economy will flatline for two consecutive quarters this year and unemployment will suffer its worst rise since the pandemic as the fallout from the Iran war takes hold, according to a leading forecasting group.
The Item Club, an independent economic research body, now expects GDP to grow by just 0.7% over 2026 as a whole, down from 1.4% last year, as soaring energy costs and supply chain disruption drag on activity.
The economy will "flirt with recession," defined as two or more consecutive quarters of contraction, in the second and third quarters of the year.
Unemployment is forecast to peak at 5.8% by mid-2027, with almost 250,000 more people out of work.
The Item Club's warning echoes a gloomy assessment from the International Monetary Fund last week, which projected UK growth of just 0.8% in 2026, the steepest downgrade among the G7 nations.
Inflation is expected to surge to nearly 4% in the second half of the year, almost double the Bank of England's 2% target, driven by higher oil and energy prices.
Despite this, the Item Club does not expect the Bank's Monetary Policy Committee (MPC) to raise interest rates in response.
Matt Swannell, chief economic adviser to the Item Club, said policymakers would not "repeat the 2022 playbook" of hiking rates as energy prices rise, arguing that the current environment is fundamentally different.
"Policy is already restrictive, and a more fragile economy means that businesses will find it harder to pass on higher costs to the consumer," he said.
The MPC is instead expected to hold rates steady before cutting twice in mid-2027 once inflation begins to ease.
The outlook stands in contrast to recent data showing the UK economy grew 0.5% month-on-month in February, its fastest expansion since January 2024, suggesting the economy carried stronger momentum into the conflict than initially thought.