UK economy shrank in April as Iran war began to take its toll

The UK economy shrank by 0.1% in April, ending a run of growth and signaling early economic damage from the Iran war. According to the Office for National Statistics (ONS), this was the first contraction since August 2025, with services—including administrative, arts, and entertainment sectors—declining by 0.2%. The ONS noted that cancellations of major sporting events in the Middle East, such as the Bahrain and Saudi Arabian Grand Prix, contributed to the downturn, alongside broader consumer caution. Manufacturing and construction showed modest gains of 0.4% and 0.1%, respectively, but these were outweighed by the sharp decline in services. Retail trade and sport/recreation activities contracted significantly, reflecting reduced consumer spending as households brace for higher energy costs. Retail sales fell at their fastest pace in over a year, excluding food purchases, as Britons cut back on discretionary spending. The slowdown follows a strong first quarter, when the UK led the Group of Seven economies in growth. However, the war’s economic shock—including energy price spikes and borrowing rate pressures—has reversed expectations of interest rate cuts, with the Bank of England (BOE) now considering potential hikes. BOE Governor Andrew Bailey has emphasized balancing inflation risks against weak demand, while Finance Minister Rachel Reeves warned that the conflict’s impact on energy infrastructure could have lasting consequences. Businesses across sectors reported reduced turnover due to the war, with manufacturing, transport, and travel agencies particularly affected. Wage pressures and Labour’s tax hikes have further strained firms, compounding the economic strain. Economists warn the slowdown may worsen in the third quarter as energy price caps rise, deepening the squeeze on households and businesses alike. US President Donald Trump has suggested a potential deal with Iran could stabilize the situation, though policymakers remain cautious about the conflict’s prolonged economic fallout. The UK’s economic outlook hinges on whether energy costs stabilize and consumer confidence recovers, with the BOE’s next move on interest rates critical to mitigating further downturn risks.