The UK economy has officially contracted, sliding into a downturn that Treasury insiders now describe as a 'prolonged instability' triggered by the escalating conflict in Iran. Sources close to the Treasury confirm that gross domestic product fell by 0.3 per cent in the last quarter, the sharpest contraction since the 2020 lockdown. The figures, released this morning, caught markets off guard, with the FTSE 100 dropping 2 per cent in early trading.
The war in Iran, now in its fourth month, has sent oil prices soaring to £120 a barrel and disrupted global supply chains. The UK, heavily reliant on energy imports, has been hit particularly hard. 'This is no longer a blip,' a senior Treasury official told me, speaking on condition of anonymity. 'We are looking at a sustained period of economic contraction. The government's own models show we could be in this for the next two years.'
Chancellor of the Exchequer Jeremy Hunt called an emergency meeting this morning with the Bank of England governor Andrew Bailey. The central bank is expected to raise interest rates again next week, potentially to 7 per cent, a level not seen since the early 1990s. That would pile more pressure on mortgage holders and businesses already struggling with rising costs.
The contraction is being felt across the economy. Manufacturing output fell 1.2 per cent, construction dropped 0.8 per cent, and services, which account for 80 per cent of the economy, slipped 0.2 per cent. The only bright spot was a slight uptick in exports of North Sea oil, but that is cold comfort for the millions facing higher bills.
Uncovered documents from the Department for Business and Trade reveal that the Treasury had been warned of this possibility six months ago. Internal memos show that officials flagged the risk of 'significant economic disruption' if the Iran conflict escalated, but those warnings were ignored by Downing Street. 'They chose to focus on the Rwanda policy and culture wars rather than prepare for this,' the official added.
The impact is already visible on the streets. Fuel prices have hit £2.50 a litre in some areas, and supermarket shelves are beginning to show gaps as supply chain costs bite. Small businesses are buckling. The Federation of Small Businesses reports that 7,000 firms have closed in the last month alone.
The governor of the Bank of England is expected to make a statement this afternoon. But behind closed doors, the mood is grim. 'We are entering uncharted waters,' a Bank source said. 'This is not just a recession. This is a crisis that will reshape the British economy for a generation.'
The government is under pressure to announce emergency measures, but with the Treasury already borrowing heavily, there is little headroom. The prime minister's spokesperson said only that they are 'monitoring the situation closely.' Independent economists are calling for rationing of energy or a windfall tax on oil companies. Neither is likely. Downing Street is paralysed, caught between a war it cannot influence and an economy it cannot control.
