The UK went into this crisis weak and may emerge from it broken
Keir Starmer may take every opportunity to stress that the UK isn’t involved in the war and wanted nothing to do with it, but our economy is nevertheless entirely at the mercy of events taking place 4,000 miles away.
The prospect of a negotiated settlement (at least anytime soon) feels remote and that uncertainty is reflected in the oil market with prices still around $100 a barrel despite Donald Trump’s optimistic talk of jointly running the Strait of Hormuz with a new, acquiescent Iranian government. Israel shows no appetite to disengage and there are reports that Saudi’s rulers are urging Trump to ‘finish the job.’
Taken together, it doesn’t feel like the smart money is on handshakes and peace treaties.
And all the while, what little confidence existed in the UK economy is being chipped away. The latest data indicate that business activity has slumped since the war started nearly a month ago.
S&P Global summed it up yesterday as they released the latest PMI figures: “Output growth across manufacturing and services has slowed to a crawl as companies blamed lost business directly on the events in the Middle East.”
Manufacturers suffered the biggest monthly increase in input prices since Black Wednesday in 1992.
And things are moving quickly.
UK faces a nasty economic contraction
Last week, analysts were downgrading forecasts for GDP growth to between 0.7 and 0.4 per cent, but as of yesterday the talk was of a recession – “a pronounced recession” – according to economists at Morgan Stanley, if interest rates climb higher and commodity prices remain high over the months ahead.
Analysts admit to being struck by how quickly the UK’s economic position has deteriorated, highlighting just how fragile our economy was before the crisis erupted. Rachel Reeves now faces the very real prospect of steering the UK through a nasty economic contraction, with all the costs and political pressures that will bring.
The timing could not be worse, with the tax burden already at a debilitating high and welfare spending set to jump by billions. The government could very soon be faced with a choice between cutting spending and raising taxes, and nothing – absolutely nothing – in this government’s short and unimpressive track record suggests they will entertain any notion of the former.
The stark truth is that the UK went into this crisis weak, and may emerge from it broken.