The UK economy has suffered a sharp contraction in the third quarter, with GDP falling by 1.2 per cent, as the escalating conflict in Iran severs key global trade routes and drives up costs for businesses and households. The latest figures from the Office for National Statistics, released this morning, confirm the worst fears of economists and signal a likely recession before the end of the year.
For working families, the news is grim. The price of a loaf of bread has risen by 15 per cent in the past month alone, as disruptions to shipping in the Strait of Hormuz delay grain imports and push up wholesale prices. Petrol prices have hit a new record of £1.85 per litre, adding £20 to the average weekly commute. Energy bills, already high, are expected to climb further as the UK relies on imports of liquefied natural gas.
The conflict began two months ago after Iranian forces blockaded the strait, a chokepoint for a fifth of the world's oil and a third of its liquefied natural gas. The UK, along with the US and EU, has sent naval vessels to protect merchant shipping, but attacks continue. The result is a supply chain crisis that has hit British manufacturers hard. Car plants in the West Midlands have cut production by 30 per cent due to a shortage of parts. Steelmakers in South Wales are stockpiling raw materials, but at huge cost.
Union leaders are calling for urgent government intervention. Sharon Graham, general secretary of Unite, said: "The government cannot stand by while families are forced to choose between heating and eating. We need price caps on energy and basic goods, and a windfall tax on the profiteers." The TUC has called for an emergency summit with ministers and employers to discuss support for wages and jobs.
Chancellor Rachel Reeves acknowledged the severity of the situation in a statement this morning. "These are difficult times," she said. "We are working with international partners to ensure the safe passage of goods, and we will support the most vulnerable through this period." But the chancellor stopped short of announcing new measures, prompting criticism from Labour backbenchers who want a return to the universal credit uplift seen during the pandemic.
Small businesses are feeling the pinch. In Bolton, bakery owner Janice Woodstock told me: "Flour has gone up 40 per cent. I've had to put my prices up, but customers are cutting back. I'm not sure how much longer I can hold on." Her story is repeated in market towns and high streets across the North and Midlands, where the cost of living crisis is deepening.
The Bank of England is in a bind. Inflation has risen to 5.8 per cent, well above the 2 per cent target, driven by fuel and food costs. But raising interest rates further would choke off growth and increase mortgage pain for millions. The Bank's Monetary Policy Committee meets next week, and markets expect a quarter-point rise to 5.5 per cent.
For now, the government's fiscal position is worsening. Borrowing is up as tax receipts fall and welfare payments rise. The Office for Budget Responsibility is likely to downgrade its growth forecasts in the autumn statement. Some economists are warning of a lost decade if the conflict drags on.
On the streets of Manchester, shoppers are stoic but worried. "I'm cutting back on everything," said single mother Claire Henderson. "The kids don't understand why we can't have treats. It's just the basics now." Her voice broke as she spoke. That is the real economy: not GDP figures but the daily struggle to make ends meet.
The government faces a choice: act decisively to shield households from the fallout, or watch the country slide into a recession that will leave scars for years.
