UK facing ‘prolonged’ period of weak growth and surge in unemployment

Britain faces a ‘prolonged’ period of weak growth and a surge in unemployment above two million, new Prime Minister Andy Burnham has been warned.

In a bleak new report, economists at the ITEM Club raised the alarm over the damaging impact of disruption and surging energy prices caused by renewed conflict in the Middle East.

The forecasting body, which uses the Treasury’s own model to carry out its analysis, predicts UK growth will slow from 1.3 per cent in 2025 to 0.9 per cent this year and 0.7 per cent in 2027.

Inflation is forecast to rise to 3.5 per cent later this year while unemployment will rise to 5.7 per cent, adding around 200,000 people to the dole queue, the report said.

It adds up to ‘a more gradual but more prolonged slowdown’ than the ITEM Club had predicted in its previous report in the spring.

Back then – with war already raging in the Middle East – it had pencilled in a sharper slowdown to 0.7 per cent growth this year but a recovery to 0.9 per cent in 2027.

‘The recent ceasefire had reduced the likelihood of some of the worst-case economic scenarios,’ the latest report said.

‘However, the ceasefire has since frayed, pushing energy prices higher again and causing renewed disruption to shipping through the Strait of Hormuz.’

PM Andy Burnham (pictured) has been warned that Britain faces a ‘prolonged’ period of weak growth and a surge in unemployment

It comes after the resumption of hostilities between the US and Iran saw the price of oil climb back towards $100 a barrel last week.

That has already resulted in higher petrol prices and raised inflation fears, which in turn has fuelled expectations of interest rate hikes and pushed up UK borrowing costs.

Those higher borrowing costs, combined with weaker growth, will make the sums harder to add up for new Chancellor John Healey in his first Budget.

He will also have to find the money to pay for Mr Burnham’s eye-catching spending pledges on energy bills, council housing and bus fares.

Matt Swannell, chief economic adviser to the ITEM Club, said: ‘The growth outlook over the next year or so is likely to be challenging.

‘Higher energy prices are adding to the pressure on households and businesses at a time when demand is already subdued.

‘We expect a sustained period of weak growth, rather than a sudden downturn. The economy is going to move forward, but at a slower pace than we have seen over the last couple of years.’