The escalating conflict between global powers has injected a new layer of uncertainty into the UK economy, with economists warning that another contraction in Gross Domestic Product (GDP) is imminent for May. The latest forecasts suggest a 0.1 per cent decline, mirroring April's downturn and underscoring the pervasive impact of the Iran war on domestic markets. With fuel and energy costs remaining stubbornly high – despite recent moderation in wholesale prices – businesses and households are being squeezed by an unprecedented combination of factors.
The Office for National Statistics (ONS) is set to publish its latest growth update on Thursday, providing a more detailed snapshot of the economy's performance in May. The data will shed light on whether the services industry, which accounts for nearly 80 per cent of UK GDP, has continued to falter, as it did in April when output fell by 0.1 per cent.
The construction and manufacturing sectors have shown some resilience, with modest growth recorded in recent months. However, these gains are being offset by the persistent weakness in services, which is weighing heavily on overall economic activity. Chancellor Rachel Reeves has acknowledged the severe domestic repercussions of the conflict, stating that while the UK has not joined the war, it will undoubtedly have an impact at home.
The ongoing high fuel and energy costs continue to pose a significant challenge to businesses, with industry leaders in the food sector warning that supermarket inflation could spike by as much as 10 per cent later this year. This would exacerbate the already strained household budgets, forcing consumers to make difficult trade-offs between essentials and discretionary spending.
Analysts at Pantheon Macroeconomics are forecasting no growth for May, attributing this outlook to the continued weakness in services. In contrast, Deutsche Bank is expecting a 0.1 per cent decline in GDP, citing sluggish activity within services, which encompasses information, professional, financial services, and real estate. Despite these downbeat forecasts, there are some anecdotal signs of resilience, with retailers reporting increased demand for outdoor furniture and fans due to warmer weather and promotions.
The Bank of England will be closely monitoring the economy's performance as it considers future monetary policy decisions. A prolonged period of low or negative growth, combined with persistent inflationary pressures, could complicate efforts to manage interest rates. For UK businesses, particularly those reliant on energy or imported goods, the sustained high costs present ongoing operational challenges. Savers may also find their returns eroded by the rising cost of living.