Economists warning of deeper damage to growth later in the year
Chancellor of the Exchequer Rachel Reeves after delivering the Mais Lecture at the Bayes Business School(Image: PA)
The UK economy lost steam in April, according to official figures, as the energy price shock stemming from the Iran war weighed heavily on businesses and consumers alike.
The Office for National Statistics reported that GDP fell by 0.1 per cent in April.
The services sector shrank by 0.2 per cent, while manufacturing output recorded no growth whatsoever. Construction, however, staged a modest recovery, posting growth of 0.1 per cent.
Across a three-month period, growth came in at 0.7 per cent, building on the momentum established during the first quarter of the year.
“Services were again the driver [over three months] with a particular strength in computer programming, marketing and wholesale companies across the three months, while construction showed some further signs of recovery after a weak winter,” said Liz McKeown, director of economic statistics at the ONS, as reported by City AM.
Reeves said: “Before the conflict in the Middle East, growth was higher than expected and inflation was falling. This is not a war we wanted or joined, but one that will have an impact at home.”
The figures illustrate how the early disruption to international trade along the Strait of Hormuz, following the outbreak of the Iran war in March, has already begun to affect UK households and businesses.
Economists have warned that the UK economy faces a more significant blow yet, as the knock-on effects of trade disruption are expected to feed through into the data later this year. Inflation is also anticipated to climb as the conflict with Iran continues, fuelling concerns that interest rates may need to rise.
The Bank of England is due to convene again next year to reassess the risk of inflation accelerating over the coming months.
Tensions have flared once more in recent days, dashing hopes of a peace agreement between the parties involved, with Iran launching missiles towards Israel and the US striking Iran’s vital infrastructure.
Fergus Jimenez-England from the National Institute of Economic and Social Research said he anticipated a slowdown in the UK economy to “intensify as higher energy costs feed through the economy, with the impact likely to be felt most acutely in the third quarter as the energy price cap rises”.
KPMG chief economist Yael Selfin said: “In contrast to 2022, subdued domestic demand is limiting firms’ ability to pass these higher costs on to consumers, which is likely to squeeze profit margins.
“This could lead firms to scale back investment plans, particularly against the backdrop of higher borrowing costs and geopolitical uncertainty.”
Global economy heading for weakest growth since pandemic.
The world economy is also on course to slow to its weakest growth rate since the pandemic, driven by the energy price shock that has pushed oil prices beyond $90 per barrel.
The World Bank said on Thursday that global growth was projected to reach 2.5 per cent, down from the 2.9 per cent figure for 2025. World Bank president Ajay Banga warned that developing nations outside of China and India would bear the heaviest burden, stating they will have “collectively experienced nearly a decade of no progress on narrowing their per capita income gap with advanced economies”.
The UN body also cautioned that economies across Europe, Central Asia and the Middle East would expand at a slower pace than those in sub-Saharan Africa and Latin America.
The sluggish growth figures across the UK and beyond are likely to ring alarm bells for Treasury officials, who are already locked in a battle with other government departments over stretched budgets.
Growth in the first quarter of the year was estimated at 0.6 per cent, though some of those gains are expected to be eroded by ongoing global conflicts.
On Thursday, John Healey quit the government, citing Sir Keir Starmer and Rachel Reeves’ failure to allocate sufficient funding to defence as his reason for stepping down.
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