The British economy has entered a contraction as the conflict in Iran escalates, according to figures released by the Office for National Statistics. Gross domestic product fell by 0.3 percent in the first quarter, driven by a sharp decline in trade and investment. The Treasury has warned that the downturn could persist for at least two more quarters, as supply chain disruptions and energy price volatility weigh on activity.
The contraction marks the first negative growth since the 2020 pandemic recession and reflects the deepening impact of the war in Iran, which has sent oil prices above $120 a barrel and disrupted global shipping routes. Exports to the Middle East, which account for 12 percent of UK trade, have fallen by 40 percent since the conflict began. The manufacturing sector has been hit hardest, with output dropping 1.5 percent, while services remain flat.
Chancellor Rachel Reeves acknowledged the severity of the situation in a statement to the House of Commons. “We are facing a global shock that is testing the resilience of the British economy,” she said. “The Treasury is preparing contingency measures to support businesses and households through this period of uncertainty.” The government has already announced a £15 billion emergency support package, including tax deferrals and energy subsidies, but analysts say more will be needed if the war drags on.
The Bank of England, which had been raising interest rates to combat inflation, faces a policy dilemma. Inflation stands at 7.8 percent, well above the 2 percent target, but further rate increases could deepen the recession. Governor Andrew Bailey indicated that the Bank would prioritise stability, hinting at a pause in tightening. “We must balance the risks of inflation against the risks of a prolonged slump,” he said. Financial markets are pricing in a 60 percent chance of a rate cut within six months.
Diplomatic efforts to end the conflict remain stalled. The United Nations special envoy reported no progress in negotiations between Iran and the Gulf states. The UK, along with the United States and France, has imposed additional sanctions on Iranian oil exports, but these have increased volatility in energy markets. The Treasury estimates that a sustained oil price above $100 per barrel could reduce UK growth by 0.5 percentage points per quarter.
Business leaders are calling for more decisive action. The Confederation of British Industry urged the government to accelerate investment in domestic energy production and to seek trade deals with non-aligned nations. “We cannot afford to rely on a region that is in turmoil,” said CBI director general Tony Danker. “The Treasury must think long-term, not just in terms of emergency packages.”
The economic downturn is already affecting household budgets. Consumer confidence has fallen to its lowest level since the 2008 financial crisis, according to YouGov. Retail sales declined 1.2 percent in March, with spending on non-essential goods dropping sharply. Analysts expect the jobless rate, currently at 4.2 percent, to rise above 5 percent by the end of the year.
The Treasury is scheduled to release its spring budget update next month, which will include revised growth forecasts. Officials privately admit that the outlook has worsened significantly since the November budget. “We are in uncharted territory,” a senior Treasury source said. “The combination of war, inflation and fiscal constraints leaves little room for error.”
