BRITAIN will be hit by faltering  growth and two million unemployed as the Middle East conflict takes hold, new forecasts show.

The influential Confederation of British Industry warns the economy will slow to 1.1 per cent in 2026 which is a downgrade from an earlier outlook of 1.3 per cent.

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The impact of the Iran war is adding to the woes of Chancellor Rachel Reeves Credit: Alamy

Rain Newton-Smith warned last week that business is at a “tipping point” as tax burden increases

The influential lobby group predict growth of 0.9 per cent next year which is lower than the 1.5 per cent originally forecast in a blow to Chancellor Rachel Reeves.

Spending and investment from government is expected to be a steady driver of growth, the group say.

The gloomy outlook on the state of the economy has been caused by the impact of the Iran War.

High global energy prices along with disrupted supply chains will all weigh on the UK’s growth prospects.

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It could see inflation hike to around 4 per cent this year as the higher energy prices feed through to businesses and households.

Unemployment is set to jump by around 200,000 as the gloomy outlook on the state of the economy was spelled out.

The rate was recently reported at 5 per cent or around 1.8 million people, the Office of National Statistics say.

But it could hit 5.5 per cent in a damning blow to jobs as firms struggle after national insurance and minimum wage hikes since Labour came to power.

The CBI say the weakening labour market is tied to reduced business investment amid higher inflation and concerns over consumer spending.

They also said that they expect the Bank of England to keep interest rates at the current level of 3.75 per cent for the rest of the year.

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.”

Rain Newton-Smith, the boss of the CBI, said in her speech to their annual dinner last week that the heavy tax burden has left firms at a “tipping point”.

She said an extra £345 billion has been added to firms’ tax bill over the past two years.  She said that businesses aren’t a “cash tap”.

Newton-Smith warned “you can’t tax your way to growth”.

She added:  “You cannot fix the cost of living without fixing the cost of doing business. And the cost of doing business is reaching a tipping point.”