UK economy shrank by 0.1% in April as Iran war held back growth

The UK economy contracted by 0.1% in April as the Iran war began to take its toll on growth, official figures show.As energy prices have risen as a result of the conflict, after Iran closed off the Strait of Hormuz – a vital shipping route for global trade – the UK’s strong expansion in the first quarter slid into reverse.The fall in gross domestic product in April, which had been expected by economists, followed a 0.3% increase in March, according to the Office for National Statistics.The data will underline fears that the UK economy will contract in the second quarter of the year.The chancellor, Rachel Reeves, has sought to argue that the economy was strong as it entered the crisis and has criticised Donald Trump’s “folly” in unleashing the conflict.Responding to the figures, she said: “Before the conflict in the Middle East, growth was higher than expected and inflation was falling. This is not a war we wanted or joined, but one that will have an impact at home.”She added: “The choices I have made as chancellor mean our economy is in a stronger position to deal with the costs of the war, and we are getting on with the job of building a stronger and more secure economy.”The GDP downturn in April was led by a 0.2% decline in services output, partly offset by a 0.1% rise in construction, the ONS said.The drivers of weak services output included the arts, entertainment and recreation sector – which the ONS put down to a decline in sports activity, including the cancellation of “multiple sporting events in the Middle East affecting the output of UK-based businesses”.While construction output was up over the month, that “came solely from an increase in repair and maintenance”, it said, with new work down 0.3% – despite Labour’s promise to “get Britain building” and its pledge to get 1.5m new homes built.Over the three months to April – a longer-term perspective that tends to be less volatile – GDP growth was 0.7%, the ONS said.Most forecasters have significantly downgraded their expectations for leading economies this year, including the UK, as higher oil prices as a result of the Middle East conflict drive up inflation and hit growth.Fergus Jimenez-England, an associate economist at the National Institute of Economic and Social Research, said: “We expect this slowdown to intensify as higher energy costs feed through the economy, with the impact likely to be felt most acutely in the third quarter as the energy price cap rises.”Thomas Pugh, the chief economist at the consultancy RSM UK, said the prospect of a Labour leadership change, with Keir Starmer expected to be challenged by Andy Burnham if he wins next week’s Makerfield byelection, will not help the outlook.“Underlying growth will slow from here, even if there is a deal in Iran,” he said. “Indeed, higher energy prices and borrowing costs along with a renewed bout of political uncertainty are likely to conspire to bring growth almost to a standstill for the rest of the year.”Data on inflation and the jobs market due to be released next week will give a clearer picture on how the outbreak of the war has affected the economy, as the Bank of England prepares to decide whether to raise interest rates next Thursday.The European Central Bank raised rates for the first time since 2023 on Thursday in response to higher inflation caused by the Iran war.The soft April data underline the fact that Bank policymakers will have to balance higher inflation against the risk of choking off weak economic growth.Financial markets eased their expectations of rate rises slightly after the GDP data, with just one quarter-point increase now expected through the rest of this year. The pound fell 0.2% against the dollar after the figures were released.