UK economy contracts as Iran conflict drives energy price shock
Official figures show services output fell while construction growth was limited to repairs, as geopolitical instability in the Middle East reverses first-quarter gains.
The UK economy contracted by 0.1 per cent in April, official figures from the Office for National Statistics (ONS) reveal, reversing the 0.3 per cent growth recorded in March. The decline marks the point at which the war in Iran began to materially impact domestic growth, driven by rising energy prices following the closure of the Strait of Hormuz. The data confirms economists’ expectations that the strong expansion seen in the first quarter would slide into reverse as geopolitical instability disrupted global trade routes.
Chancellor Rachel Reeves sought to frame the contraction as an external shock rather than a failure of domestic policy. She stated that the economy was stronger than expected prior to the conflict and argued that her fiscal choices have positioned the country to manage the associated costs. Reeves criticised US President Donald Trump’s role in the escalation, describing his actions as “folly” that unleashed a war the UK did not seek, but maintained that current policies ensure the nation is better equipped to handle the economic fallout.
Sectoral data indicates a divergence in performance, with services output falling by 0.2 per cent. The decline was partly driven by weakness in administration, as well as the arts, entertainment, and recreation sectors. In contrast, construction output rose by 0.1 per cent, although the ONS noted this increase came solely from repair and maintenance work. New construction work actually fell by 0.3 per cent, a trend that contrasts with the Labour government’s pledge to build 1.5 million new homes.
Fergus Jimenez-England, an associate economist at the National Institute of Economic and Social Research, warned that the economic slowdown is expected to intensify. He noted that higher energy costs are feeding through the economy, with impacts likely to be most acute in the third quarter as the energy price cap rises. Most forecasters have significantly downgraded their expectations for leading economies this year, citing higher oil prices as a primary driver of inflation and reduced growth.
Looking ahead, the ONS data underscores fears that the UK economy will contract in the second quarter. Further clarity on the war’s impact will emerge next week with the release of inflation and jobs market data, ahead of the Bank of England’s interest rate decision on Thursday. Over the three months to April, GDP growth stood at 0.7 per cent, offering a less volatile long-term perspective amid the current volatility.