Unemployment is poised to surpass two million as the Iran war hits the British economy, analysts have warned.
The jobless rate will jump from 4.9pc to 5.7pc by early 2028, economists at Barclays said, increasing the number of unemployed people from 1.8 million to 2.1 million.
Britain has not had more than two million jobseekers for more than a decade. The last time was in 2014, when the economy was still recovering from the financial crisis.
At the same time, workers’ wages will fail to keep up with rising inflation, as petrol costs surge and household energy bills jump again over the winter.
The developments represent a fresh setback for John Healey, the Chancellor, by weakening the economy and harming the public finances. Mr Healey is preparing to deliver his maiden Budget on Oct 28.
Jack Meaning, an economist at Barclays, said the number of unemployed is forecast to rise to a peak of more than 2.1 million within the next 18 months as more expensive energy, higher interest rates and weak hiring all hit workers’ prospects.
Compared with forecasts before the war, Britain faces “a higher path for inflation, a lower path for growth and a worse outlook for unemployment”, Mr Meaning said.
“The Bank [of England] has already delivered a tightening of policy pretty much in line with what its international peers have said, just because it has moved from a position of expecting cuts to expecting a hold,” said Mr Meaning.
This has forced borrowing costs for businesses and households back to levels seen in early 2024, before the Bank of England began to cut the base rate from its previous highs of 5.25pc.
Barclays expects two increases from the Bank, taking the base rate from 3.75pc currently to 4.25pc early next year.
“The consequence of all of that is the economy will be slowing in the next few quarters and we will see the unemployment rate rise,” said Mr Meaning.
Overall, the economy will be 0.8pc smaller next year than it would have been without the war, Barclays predicts.
That is equivalent to the UK missing out on £23bn of economic output.
Mr Meaning said that much of the growth in the economy is likely to be driven by technology investment.
This may prove to be valuable at a time of booming interest in AI but it is also unlikely to create a surge in hiring, resulting in relatively flat employment.
That in turn means that growth in the workforce, resulting from migration or from school and university leavers, will lead to more unemployment.
The weak jobs market means workers can expect only modest pay rises, Barclays predicts, leaving earnings trailing inflation.