UK economy shrinks in April as Iran war energy shock takes toll

The UK economy shrank by 0.1% in April compared to the previous month, ending a streak of monthly growth that had lasted since last summer, data published on Friday by the Office for National Statistics (ONS) showed. This suggests the Iran war is beginning to weigh on British output.

Services, the dominant sector of the British economy, fell by 0.2% on the month, while production was flat and construction inched up by 0.1%. Over the three months to April, GDP still expanded by 0.7%, the fifth consecutive period of three-month growth.

The biggest single drag on output came from sports, amusement and recreation activities, which plunged by 9.1%. The ONS attributed part of the fall to the cancellation of multiple sporting events in the Middle East, which hit the revenues of UK-based businesses. Consumer-facing services dropped by 0.5%, with retail trade down 1.3%.

"While the three-month growth has held up, the first quarter of the year is looking very much like a false dawn, and with repeated resolutions between the US and Iran failing to pass, conditions are going to remain tough for longer still," said Stuart Clark, portfolio manager at Quilter.

Sanjay Raja, chief UK economist at Deutsche Bank, also noted that fuel consumption was down nearly 10% as consumers pulled back. "As the Iran conflict unfolds, it's clear that the energy shock is starting to catch up with households and businesses," Raja said.

Manufacturing was a rare bright spot, rising by 0.4% thanks to pharmaceuticals and basic metals, which Raja suggested may reflect firms stockpiling "amid elevated geopolitical uncertainty".

The ONS reported separately that 40% of trading businesses saw the prices of goods they bought rise in April, the highest share since December 2022, highlighting the inflationary pressures policymakers are facing. The figures are likely to complicate the Bank of England's task, as policymakers weigh mounting price pressures against signs of slowing economic growth.

"With a stagflationary feel to the economy, the last thing it wants to be doing is to raise interest rates, but that is what is being priced in as inflation remains the bigger concern for now," Clark said of the Bank of England, which announces its next rate decision next Thursday.

Raja expects a further slowdown in growth, warning that "activity will continue to slow as real incomes get squeezed by higher energy prices and higher market rates start to eat further into household budgets." Deutsche Bank still expects the UK economy to grow by 1% this year, outpacing most of its G7 counterparts.