In April 2026, the UK economy shrank for the first time in eight months, official figures showed. The 0.1% contraction in gross domestic product (GDP) was driven by rising energy prices and disruption to global trade caused by the Iran war. It was a stark reminder that events thousands of miles away can quickly hit household budgets and business costs in Britain.
The figures, from the Office for National Statistics (ONS), showed that the economy shrank by 0.1% in April compared with March, when it grew by 0.3%. Looking at a less volatile three-month measure, GDP rose by 0.7% in the period to April. The contraction came as a result of higher oil prices after Iran effectively closed the Strait of Hormuz, a vital shipping route for oil tankers. Crude oil prices surged, with Brent crude reaching $120 a barrel before falling to a three-month low of $86 in June on hopes of a resolution.
“How the Iran war caused the UK economy to shrink in April 2026, and why oil prices matter for growth.”
The UK is not a major oil producer, so it is heavily exposed to global oil price swings. Higher oil prices push up the cost of petrol and diesel at the pump, and feed through to household energy bills. The energy price cap is set to rise in July, adding to pressure on consumers. Businesses also face higher costs for fuel and raw materials, but subdued domestic demand limits their ability to pass those costs on, squeezing profit margins, according to Yael Selfin, chief economist at KPMG UK.
The impact is already visible. The ONS said the services sector – which accounts for around 80% of the economy – fell by 0.2% in April, partly because of cancelled sporting events in the Middle East that affected UK-based businesses. Construction output rose by 0.1%, but only due to more repair and maintenance; new work fell. Chancellor Rachel Reeves said the war “will have an impact at home”, but argued that the economy was in a stronger position to cope because of her decisions.
Most forecasters expect the UK economy to slow further as higher energy costs feed through. Fergus Jimenez-England of the National Institute of Economic and Social Research said the impact would be “felt most acutely in the third quarter as the energy price cap rises”. The Bank of England is widely expected to keep interest rates unchanged at its next meeting.
Q: How does a war in the Middle East affect the UK economy? The main channel is through oil prices. When conflict disrupts oil production or shipping routes – like the Strait of Hormuz – crude oil prices rise. That pushes up fuel costs for businesses and households, and since oil is used in making and transporting almost everything, it raises costs across the economy. Lower consumer spending and higher business costs then drag on GDP growth.
Q: What is the Strait of Hormuz and why does it matter? The Strait of Hormuz is a narrow waterway between Iran and Oman through which about a fifth of the world’s oil passes. If it is closed or disrupted, tankers cannot get oil out of the Persian Gulf, causing global oil prices to spike. The Iran war led to its effective closure, which is why oil prices surged.
Q: Will the UK economy recover quickly? That depends on the conflict. If the war ends and the Strait reopens, oil prices could fall back, easing pressure on consumers and businesses. But if the conflict drags on, higher energy costs will persist, and the economy could continue to shrink. Most economists expect the slowdown to intensify in the coming months, with the energy price cap rise adding to the squeeze.
What happens next? The Bank of England meets next week to decide on interest rates, and is expected to hold them steady. The energy price cap will rise in July, hitting household bills. And all eyes are on whether the Iran conflict can be resolved: oil prices fell sharply in June on hopes of peace, but the situation remains uncertain.