CBI Cuts UK Growth Forecast and Warns of 2 Million Unemployed as Iran War Compounds Low-Growth Outlook
The Confederation of British Industry cut its forecast for UK economic growth on Tuesday and predicted that unemployment would rise to its highest level since mid-2015 as the Iran war continues to push up energy prices and squeeze household living standards. The CBI now expects UK GDP to grow 1.1 percent in 2026 and 0.9 percent in 2027 — 0.2 and 0.6 percentage points less than its forecast last December respectively — and projects unemployment to peak at 2.0 million people, or 5.5 percent of the workforce, against its previous forecast of 5 percent. who
“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,” CBI Chief Economist Louise Hellem said. who
The CBI’s inflation outlook tracks closely with the Bank of England’s own projections. Consumer price inflation looks set to peak at 3.7 percent in the first quarter of next year, up from 2.8 percent in April. That peak is almost identical to the Bank of England’s central scenario under its Iran war modelling, and puts headline CPI nearly double the Bank’s 2 percent target before it begins to fall back. who
On interest rates, the CBI aligned with the market consensus. The Bank of England is expected to leave rates unchanged at 3.75 percent through 2026 and 2027. An extended hold at the current rate — itself already 100 basis points above the Bank’s estimated neutral rate — means monetary conditions will remain restrictive throughout a period in which the CBI expects growth to slow further and unemployment to rise. who
The CBI noted that its forecasts sit within a broader pattern of institutional pessimism about the UK outlook. The CBI’s forecasts are similar to ones released in the past month by the OECD and the IMF. The OECD published its annual economic outlook last week projecting the UK’s jobless rate would rise to 5.5 percent — the steepest increase among G7 nations — and GDP growth of 0.9 percent in 2026 if the conflict continues. The convergence of three major forecasting bodies around broadly similar numbers reinforces the assessment that the UK is entering a sustained period of sub-trend growth with rising unemployment. who
The CBI’s intervention arrives amid tension between the business community and the Starmer government over the tax burden on companies. The CBI said that businesses accounted for 31 percent of British tax revenues last year — the highest proportion since comparable records began in 1998. CBI Chief Executive Rain Newton-Smith last week urged Prime Minister Keir Starmer’s government not to treat business as “a cash tap” and said businesses’ contribution to overall taxation had risen to a record high. The employer body put the cost of the April 2025 employer national insurance increase at £27 billion, or $36 billion — equivalent to the wages of 1.3 million young people on the minimum wage, at a moment when the government is under pressure to address rising youth unemployment. Wikipedia + 2
Regional and Global Impact
The CBI’s downgrade adds to a body of UK economic data released this week that points consistently in the same direction. On Monday, the REC-KPMG Report on Jobs showed permanent hiring fell at its fastest pace since July 2025 in May, extending an unbroken 44-month contraction to a new record. IDR’s pay settlements survey showed the median award holding at 3.5 percent but the proportion of employers settling at 4 percent or above rising to 33 percent — a signal that cost pressures are beginning to feed upward through the wage distribution even as employment volumes contract.
The combination of sub-2 percent GDP growth, inflation projected to peak at 3.7 percent, and unemployment rising toward 5.5 percent describes a stagflationary environment in which conventional policy tools — rate cuts to support growth, rate hikes to contain inflation — are in direct conflict. The Bank of England’s expected hold at 3.75 percent through 2026 and 2027 reflects precisely that bind, confirmed by MPC member Alan Taylor’s comments on Monday that a rate hike would only be warranted in the worst-case Iran scenario.
For Chancellor Rachel Reeves, who attended G7 finance minister meetings in Paris this week to coordinate on the economic fallout from the war, the CBI forecast sharpens the fiscal pressure. An unemployment rate rising toward 5.5 percent will increase welfare spending automatically while simultaneously reducing income tax and national insurance receipts — a deterioration in the structural fiscal position that limits Reeves’s room to announce the household and business support packages her office signalled are coming this week.
Background
The CBI is the UK’s largest employer organisation, representing businesses that together employ approximately one third of the private sector workforce. Its twice-yearly economic forecast carries significant weight as a barometer of business-sector confidence and forward planning. The organisation’s December 2025 forecast was produced before the Iran war began on February 28, making Tuesday’s revision the first formal CBI assessment to incorporate the war’s full economic impact. The UK entered 2026 already carrying the cost shock of the April 2025 employer national insurance increase and the April 2026 minimum wage uplift — two sequential labour cost increases that CBI members were absorbing before the energy price shock from the Hormuz closure was added on top. UK GDP growth in 2025 was 1.4 percent, according to OECD data, making the CBI’s 2026 forecast of 1.1 percent a modest but meaningful step down that the 2027 figure of 0.9 percent extends further.
What Happens Next
Chancellor Reeves is expected to announce additional household and business support measures this week following her Paris G7 meetings, with the precise form and scale of those measures not yet disclosed. The Bank of England’s Monetary Policy Committee meets on June 18 to set the policy rate, with the CBI’s 3.75 percent hold forecast aligning with market pricing and MPC member Taylor’s guidance from Monday. The Office for National Statistics will publish official UK CPI and earnings figures before the MPC decision, providing the final data inputs the committee will use in its deliberations. The CBI has not set a date for its next formal economic update.
