The British Chambers of Commerce (BCC) has warned that renewed conflict in the Middle East will weigh on UK growth, push inflation higher and drive up unemployment in the coming years.

In its latest economic forecast – the first business assessment since last week’s Spring Statement and the escalation of tensions in Iran – the BCC has revised down its forecast for GDP growth in 2026 to 1 per cent, from 1.2 per cent previously. It expects growth of 1.3 per cent in 2027 and 1.1 per cent in 2028, pointing to weak productivity, subdued business investment and cautious consumer spending.

Higher oil and gas prices linked to the situation in the Middle East are now expected to push CPI inflation up to 2.7 per cent by the end of 2026, compared to 2.1 per cent in the BCC’s previous forecast, before easing back towards the Bank of England’s 2 per cent target in 2027 as energy prices fall and wage growth moderates. Wage growth is forecast to stay just below 4 per cent through 2026, then slow to below 3 per cent during 2027.

The labour market is set to soften further. The BCC now expects the unemployment rate to rise to 5.5 per cent in 2026, up from a previous projection of 5.1 per cent, and to remain at 5.5 per cent in 2027 before easing slightly to 5.3 per cent in 2028. The organisation is particularly concerned about youth unemployment, which it says is being exacerbated as high labour costs and greater use of artificial intelligence reduce the number of entry level roles. It expects youth joblessness to reach 17 per cent in 2026, peak at 17.1 per cent in 2027 and edge down to 16.7 per cent in 2028.

According to the forecast, elevated energy prices and persistent price pressures could also delay further interest rate cuts, with the Bank of England’s base rate expected to stay at 3.75 per cent this year before falling to 3.25 per cent by the end of 2027.

Commenting on the outlook, Vicky Pryce, chair of the BCC Economic Advisory Council, said the latest bout of global turmoil had ensured “choppy waters” for businesses this year, warning that many of the factors shaping the UK’s prospects lie outside domestic policymakers’ control. She added that while a rapid resolution to the conflict could see conditions “bounce back quickly”, supply constraints would take time to unwind, as seen after the invasion of Ukraine and the lifting of early Covid restrictions.

Pryce said rising unemployment – particularly among younger people – was likely to be a “worrying drumbeat” throughout the year, with the expected slowdown in global growth set to hit consumer and household spending and potentially the housing market.

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