The UK economy contracted by 0.1% in April — the first monthly fall since August last year — as the Iran war began to bite, the Office for National Statistics (ONS) said, with some firms citing the conflict in the Middle East as having raised costs and affected turnover.
The war triggered the effective closure of the Strait of Hormuz, a key shipping route for oil tankers, sending crude oil prices surging. Brent crude rose as high as $120 a barrel, though hopes of a resolution later pushed the price down to a three-month low of $86 on Friday. The jump in oil prices has already pushed up petrol and diesel costs in the UK, and household energy bills are set to rise further with the energy price cap increasing in July.
“UK economy shrank 0.1% in April, first fall since August, as Iran war drove oil prices and costs.”
Yael Selfin, chief economist at KPMG UK, warned that while the economy grew 0.7% over the three months to April — a less volatile measure — "the contraction in April is more indicative of growth prospects for the economy going forward." She added that it "points to renewed fragility in the UK economy, with pressure on both consumers and businesses likely to persist over the coming months." Consumers, bracing for a sharp rise in energy bills, "have signalled their intention to cut back on purchases and increase their savings, which will weigh on economic activity," Selfin said. Businesses, meanwhile, 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 of the Exchequer Rachel Reeves acknowledged the war "will have an impact at home." She said: "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 struck a different note, saying "putting Benefits Street first leaves the economy weaker."
Analysts expect the Bank of England to keep interest rates unchanged when it meets next week, after a stronger-than-expected March was followed by April's contraction. The 0.1% drop had been forecast by economists, and the question now is whether the fragile recovery can withstand the continued ripple effects of the conflict.