The Iran war could trigger 150,000 UK job losses and cost the average household £730, experts have warned. An economic downturn caused by the Middle East conflict is forecast to hammer the UK’s already go-slow growth this year and next.
Advisory firm Oxford Economics predicts the hit to firms will mean unemployment grows by 0.5%, or the equivalent of 150,000 jobs. It also warns that inflation will jump to 4.5% this year, up from the 3.3% it reached in March as confirmed by the Office for National Statistics. The jump on this scale is much more than the 3.5% peak forecast by the Bank of England and a number of other economists.
Michael Saunders, senior advisor at Oxford Economics and a former rate-setter at the Bank of England, said: “Even if the war ended very soon, the outlook for the economy is pretty grim.”
He also warned about the impact on household budgets from soaring fuel and other costs.
“The average household will be about £730 a year worse off than we expected at the start of this year,” Mr Saunders told an event organised by think tank the Resolution Foundation. “Of course, it could be worse if the war goes on for longer.”
The concern is around both the immediate impact of the conflict, in terms of higher energy costs and the like, as well as what are called the secondary effects, for instance workers demanding higher wages to offset what they fear will be increasing inflation.
Mr Saunders predicted the Bank may increase rates to 4.25% later this year, especially if, as it forecasts, inflation reaches 4% by July.
However, other economists are far less certain the Bank will press ahead with any increases. Liz Martins, senior UK economist at HSBC, told the same event she thought inflation was still only likely to rise to around 3.5%.
It came as the Resolution Foundation says an energy shock caused by the Middle East war will cost UK households a combined £11billion this year.
The think tank also warned a deterioration in the Middle East conflict could result in a £16 billion hit to government borrowing by 2029/30. This would wipe out nearly three-quarters of the headroom Chancellor Rachel Reeves built up in her last Budget.
“The conflict is going to make the state poorer too. A deterioration in the conflict that sustains some of the worst hits to the economy could deal a £16 billion hit to the public finances.
“The Chancellor deserves credit for building up enough of a buffer in last year’s Budget to withstand a hit of this scale. And by keeping any support with energy bills targeted and temporary, she should be able to weather this latest economic shock with her fiscal rules intact.”