The UK economy shrank in April, the first monthly fall since August, as the Iran war began to bite – pushing up oil prices and squeezing businesses and households alike. Official data from the Office for National Statistics showed a 0.1% contraction, which some firms blamed on higher costs and lower turnover triggered by the conflict in the Middle East.
The war effectively closed the Strait of Hormuz, a vital shipping route for oil tankers, sending crude prices soaring. Brent crude hit $120 a barrel before fluctuating as hopes of an end to the conflict rose and fell. On Friday it sank to a three-month low of $86 on hopes that a resolution could be close. But the impact has already rippled through the UK: petrol and diesel prices have risen, and household energy bills are set to increase further when the energy price cap rises in July.
“UK economy shrank 0.1% in April, first monthly fall since August, as Iran war drove up oil prices and hit spending.”
April’s contraction was widely expected by economists after stronger-than-expected growth in March. Analysts said that after a good start to the year, the economy was set to slow in the coming months, and they expect the Bank of England to keep interest rates unchanged when it meets next week. The ONS also reported that in the three months to April – a less volatile measure – the economy grew by 0.7% compared with the previous three-month period.
Yael Selfin, chief economist at KPMG UK, said that while the three-month figure was positive, “the contraction in April is more indicative of growth prospects for the economy going forward”. She pointed to “renewed fragility in the UK economy, with pressure on both consumers and businesses likely to persist over the coming months”. Consumers, she added, are bracing for a sharp rise in energy bills and “have signalled their intention to cut back on purchases and increase their savings, which will weigh on economic activity”. Businesses face rising costs, but “subdued domestic demand is limiting firms’ ability to pass these higher costs on to consumers, which is likely to squeeze profit margins”.
Chancellor Rachel Reeves said the war “will have an impact at home”. She added: “Before the conflict in the Middle East, growth was higher than expected and inflation was falling. The choices I have made as Chancellor mean our economy is in a stronger position to deal with the costs of the war.” Shadow chancellor Mel Stride countered, saying “putting Benefits Street first leaves the economy weaker”.