Britain faces a projected loss of 163,000 jobs this year, with lower-income regions set to bear the brunt of the economic fallout from the Iran war, a new report warns.

The Item Club’s latest regional outlook highlights south Wales and Humber, two of the UK’s most economically vulnerable areas, as those most likely to endure severe job market difficulties over the coming year.

These regions, heavily reliant on manufacturing and construction, are particularly susceptible to sharp increases in energy prices and supply chain disruptions stemming from the Middle East conflict. The report forecasts job reductions of 5,700 in south Wales and 2,800 in Humber by 2026.

Tim Lyne, economic adviser to the Item Club, explained: “Some of the lowest income regions will feel the biggest effects of the manufacturing and construction sectors reducing headcount in the face of rising energy prices and supply chain disruption.

“While consumers in these areas typically have less rainy-day savings, which will reduce spending in the retail and hospitality sectors.”

Overall, the report predicts a 0.4 per cent decline in UK employment this year, equating to 163,000 net job losses. This downturn is attributed to a pullback in consumer spending, escalating costs for fuel, energy, materials, and ingredients, alongside significant shipping disruptions.

The Bank of England recently cautioned that UK unemployment could climb to 5.6 per cent this year, up from its current 5.2 per cent, under its more pessimistic scenario regarding the war’s impact.

The Item Club further noted that as households curb discretionary spending amid a surging cost of living, the retail and hospitality sectors in Britain’s major cities will experience the most significant slowdowns.

London is expected to see a drop of 25,000 jobs, Birmingham 12,500, Leeds 9,800, and Glasgow 6,200, as these sectors contract.

However, the outlook isn’t entirely bleak, with Cambridge anticipated to experience employment growth in 2026, and Belfast and Edinburgh projected to face relatively limited job losses.

Mr Lyne added: “Across the UK, the jobs market is going to soften, but it’s looking especially fragile in south Wales and Humber as they’re particularly exposed to manufacturing businesses that are seeing big increases in their costs of materials. Resilience will come in places like Cambridge, where the tech sector is based.”

While publicly funded sectors, including education, public administration, and health and social work, are expected to increase hiring this year, these gains will not be sufficient to offset the broader job market contractions.

The report also issues a stark warning about a widening disparity in living standards across the UK, exacerbated by the Iran war.

Lower-income households are set to endure the steepest increases in the cost of living, as a larger proportion of their income is spent on essentials such as food, fuel, and energy bills, all of which are forecast to see substantial price hikes.

Cities like Newcastle, Belfast, and Birmingham see households dedicating up to 13 per cent of their disposable income to energy and food, significantly higher than the less than 9 per cent for an average London household.

This disparity leaves these cities particularly vulnerable if the Iran war continues unresolved, according to the Item Club.

A government spokesperson said: “Recent figures show that there was an improvement in the labour market at the beginning of the year with unemployment falling below 5 per cent, and 332,000 more people in work than a year ago.

“But we cannot escape the effects of the war in the Middle East, which are likely to feed through to prices and employment in the coming months.

“We will do everything we can to support the country through this period, including by slashing energy bills by up to 25 per cent for 10,000 manufacturers.

“Our mission for clean power by 2030 will get us off the rollercoaster of fossil fuel prices, to cut bills for businesses and households for good.”

German energy firm E.On has agreed to buy rival Ovo in a deal which would create Britain’s largest supplier.

The combined business will serve about 9.6 million customers, surpassing current top supplier Octopus.

The firms did not disclose the value of the deal, although previous reports indicated that it could be as much as £600 million.

The takeover is subject to regulatory hurdles, including potential scrutiny from the UK’s competition watchdog, and is expected to complete in the second half of 2026.

Stephen Fitzpatrick, founder of Ovo, said: “Energy retail is now more regulated, more capital intensive and increasingly dependent on long-term investment and scale.

“In that context, bringing Ovo together with E.On is the right next step for customers, for colleagues, and for the long-term commitment that decarbonisation requires.”

Ovo has also agreed to sell its home services division, which provides boiler servicing and insurance, to Hometree.

Marc Spieker, chief operating officer commercial at E.On, said: “The United Kingdom is an important growth market for E.On, particularly for flexibility and customer‑focused energy solutions.

“The planned acquisition of Ovo strengthens our retail business and underlines our commitment to be the trusted partner of choice for our customers.

“Energy flexibility and electrification are becoming increasingly important and are critical to the success of the energy transition.

“At E.On, we are passionate about developing solutions that enable customers across Europe to play an active role in making our energy systems both reliable and affordable.”

Chris Norbury, chief executive of E.On UK, said: “Solar, batteries, electric vehicles and a retailer built to orchestrate.

“That is what this deal is about: customers in control and new energy that works for everyone.”