The International Monetary Fund (IMF) has cut its forecast for UK economic growth in 2026 to 0.8%, down from 1.3%.
The downgrade comes as the Iran crisis pushes up inflation.
Susannah Streeter, chief investment strategist at Wealth Club, said: “The IMF downgrade is a fresh blow to Chancellor Rachel Reeves and the government’s elusive search for growth.
“The UK is set to be battered by hot oil prices, an energy bill crisis and a tightening of consumer spending.
“The economy was already flatlining even before war erupted in the Middle East, and now there is little means of resuscitation available given that interest rates look set to ramp up to curb inflation.”
Streeter added: “Hopes of fresh talks to find a resolution to the conflict are providing a balm of sorts.
“One to two interest rate increases are now being priced into financial markets instead of the scary three to even four hikes temporarily forecast, but it’s still going to be tough going ahead if borrowing costs rise further.
“Plans for a big bang of home construction with 1.5 million new dwellings targeted by the government have turned into more of a whimper.”
She said: “Property companies have scaled back ambitions as the Middle East crisis has hurt demand, and high uncertainty lingers.
“The government’s latest lever to pull is a closer relationship with Europe, but a deal on accepting single market rules will take time to be agreed, so it won’t nudge growth forward any time soon.
“As companies batten down the hatches and try to wait for the storm to pass, investment plans are being trapped. The UK is stuck in a stagflation scenario and risks of a recession are rising fast.”
Adam French, head of consumer finance at Moneyfacts, said: “The longer the conflict in the Middle East wreaks havoc on global supply chains, the more it will damage household finances.
“The prospect of rates ticking upwards again will be unwelcome news for borrowers, but surging prices and nominal economic growth is financially ruinous for almost everyone.
“Prices in the UK have already risen by more than 28% since 2020.”
French added: “While history doesn’t always repeat, it often rhymes and a second energy shock of the decade threatens to further erode spending power and living standards in a cruel echo of 1970s style stagflation.
“That much-maligned decade was characterised by intense inflation which peaked at over 25%, high unemployment and industrial unrest.
“However, lessons can be learned from the past. Prioritising an emergency savings buffer is key as financial flexibility can be invaluable in uncertain times.”
He said: “Locking in certainty where possible, such as fixing mortgage or energy costs and avoiding variable debt can also boost financial resilience.
“Households should also consider stress-testing their budgets against higher living costs to identify and eliminate any unnecessary spending.
“The conflict in Iran quickly upended rate expectations and sent borrowing costs skyrocketing as money markets adjusted to substantially higher inflation expectations which is set to further squeeze UK households.”
He added: “Typical mortgage rates have already rocketed to meet these expectations, with two-year fixes increasing by more than 100 basis points from 4.84% to 5.89% in little over a month since the conflict began and five-year fixes up by over 80 basis points, from 4.96% to 5.77%.
“The cheapest deals available to borrowers have moved dramatically too, the lowest two-year fixed rate available to borrowers across the UK at 60% LTV has increased by over 100 basis points from 3.51% to 4.66%.
“For many borrowers, the cost could be significant. Someone taking out a typical two-year fix will find it costs £100s more per month on average compared to just a few weeks ago.
“However, the real payment shock will be felt by those coming off older five-year deals, where rates have more than doubled, pushing up repayments by many hundreds of pounds per month.”