The BCC said the ongoing conflict is also set to cause slow growth this year, no cuts to Bank of England base rate and rising unemployment as the labour market softens.

The trade body’s forecast is the first economic assessment by a business organisation since last week’s Spring Statement and renewed conflict in the Middle East.

The Iran war has already caused a rise in swap rates, causing many lenders to hike mortgage rates and reprice their ranges.

The BCC said the geopolitical situation remains highly uncertain, and that the economic outlook could change considerably.

But the organisation said higher oil and gas prices linked to the current conflict in the Middle East are expected to push CPI inflation up to 2.7% by the end of 2026 (compared to 2.1% in the previous forecast).

Inflation was 3% in January, and at the time of the announcement in February the Bank of England said it expected this to fall to below its 2% target by the end of the Spring.

The Office for Budget Responsibility said last week it expected inflation to fall to 2% by late 2026.

The BCC expects gross domestic product in 2026 to fall to 1%, down from 1.2% previously forecast, before rising to 1.3% in 2027 and 1.1% in 2028.

Energy prices are assumed to rise in the near term before easing later in the forecast period. Inflation is then forecast to ease back towards the Bank of England’s target in 2027, slowing to 1.9% by Q4 2027, as energy prices fall and wage growth moderates.

Meanwhile unemployment is expected to increase to 5.5% in 2026, up from 5.1% in the previous forecast.

The BCC then expects joblessness to stay at that rate through 2027 due to persistent high labour costs and hiring uncertainty. 

The interest rate is expected to remain at 3.75% this year, before cuts to 3.25% by the end of 2027.

Exports are projected to grow by just 0.7% in 2026, down from 1.8% in the last forecast, as global uncertainty hits UK trade.

The services sector continues to drive the UK’s limited GDP growth. However, even the pace of services growth is forecast to ease, to 1.2%. Construction and manufacturing are forecast to contract this year, by –1.3% and –0.3% respectively.

In the short term, wage growth is expected to remain elevated through 2026, staying just below 4%, before easing towards a more sustainable rate below 3% during 2027.

BCC head of research David Bharier said: “UK economy remains stuck in a low-growth pattern. Our forecast of just 1% growth in 2026 reflects weak productivity, subdued investment and cautious consumer spending.

“The recent escalation of conflict in Iran risks interrupting progress made on inflation. Higher energy prices linked to it could keep inflation firmly above the 2% target and lead the Bank of England to hold the interest rate longer than expected.

“Much depends on the duration of the conflict. Covid supply shutdowns showed how sudden stops put long term damage into the trading system.”