UK economic growth is set to falter and unemployment will worsen as the conflict in the Middle East and rising energy costs weigh on consumers and firms, new forecasts have warned.
Influential business group the Confederation of British Industry (CBI) warned that around 200,000 more Britons are on track to become unemployed in a gloomy outlook for the state of the economy.
Its latest economic forecast predicted that UK unemployment will rise to 5.5% this year, which would represent around two million people.
The unemployment rate was most recently reported at 5%, or around 1.8 million people, by the Office for National Statistics.
Economists from the CBI said the weakening labour market is linked to reduced business investment in the face of higher cost inflation and concerns over consumer spending.
It predicted that unemployment will then reduce to around 5.3% for 2027.
It came as the organisation downgraded its growth projections for the next two years.
Forecasts predicted that UK gross domestic product (GDP) will slow from 1.4% growth last year to 1.1% in 2026 and then 0.9% in 2027.
Previously, it had pointed towards growth of 1.3% this year and 1.5% in 2027.
The downbeat outlook is largely caused by the impact of the conflict in the Middle East, which has caused inflation to lift above forecasts and dampened sentiment.
Higher global energy prices, disrupted supply chains, and increased uncertainty for businesses and consumers are all set to weigh on growth.
Louise Hellem, chief economist at the CBI, said: “What’s happening around the world is compounding the UK’s low-growth story.
“We saw weak momentum throughout 2025, but if it weren’t for the latest global shocks, we could be having a much more positive conversation about the economy today.
“Last year it was tariffs and this year it’s the conflict in the Middle East.”
The projections also indicated that inflation is likely to increase “towards 4%” by the end of this year, as higher energy costs feed through to firms and households.
UK consumer prices index (CPI) inflation was most recently recorded at 2.8% in April but is expected to accelerate in the coming months.
The CBI said it expects the Bank of England to maintain interest rates at their current level of 3.75% for the rest of this year.
This article was written by Henry Saker-Clark from The Evening Standard and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.