The UK economy's momentum has been dented by a 0.1% contraction in GDP in April, a downturn that can be directly attributed to the initial impact of soaring energy prices caused by the Iran conflict. This setback marks a notable slowdown from the stronger start to the year, with official data revealing a 0.2% decline in the services sector and flatlining manufacturing output.
Despite this, the construction sector showed signs of resilience, posting a modest 0.1% increase. Moreover, the three-month growth trend remained positive at 0.7%, driven by sectors such as computer programming, marketing, and wholesale companies. This indicates that some segments of the economy continue to perform relatively strongly.
Economists warn that the full extent of the economic damage from the Strait of Hormuz conflict may yet be felt, with delayed trade disruptions likely to manifest in future data releases. Simultaneously, concerns are rising over inflationary pressures stemming from the conflict's persistence, potentially prompting the Bank of England to reassess interest rates.
The UK's economic woes mirror a broader global trend, with the World Bank forecasting a slowdown to 2.5% growth this year – the lowest since the pandemic. This deceleration is primarily driven by the energy price shock, which has propelled oil prices above £67 per barrel (£90 per barrel USD). Developing nations, excluding China and India, are expected to bear the brunt of this slowdown, potentially experiencing a decade-long stagnation in narrowing their per capita income gap with advanced economies.
The lower growth projections for both the UK and global economy will likely cause concern within the Treasury, which is already facing tight budget constraints. The initial strong growth seen in the first quarter – estimated at 0.6% – may now be partially offset by ongoing global conflicts and their economic repercussions.