UK economic rebound to be short-lived as Iran war shock looms
The UK economy is predicted to have seen modest growth at the start of the year while the labour market appeared to be easing and interest rates were very much on a downward path.
Forecasters agreed the outlook for the UK economy looked reasonably promising, if not exciting.
That was until President Trump spoiled the party.
This Friday, economists and policymakers will get sight of how the country performed in January after a difficult end to 2025.
A Bloomberg poll of economists has pencilled in 0.2 per cent growth over the first month of the year, which Deutsche Bank’s Sanjay Raja said would show the UK starting the year on a “strong footing”.
“Better activity in large part, we think, will be driven by a few factors: stronger retail spending, including leisure activity, alongside stronger rebounds in administrative and support services, as well as transport and storage activity,” Raja said.
Manufacturing output is expected to have grown while construction output is also set to pick up after a heavy tumble in December. So far, so good.
Next week, the Office for National Statistics (ONS) will also unveil fresh labour market statistics that would have otherwise made for better reading on the jobs market.
Pantheon Macroeconomics analysts believe that figures could show the labour market close to stabilisation, with recent survey data suggesting that there had been a “strong improvement” across the country.
One report by Manpower Group said hiring confidence levels had increased at its highest rate in five years, with the UK enjoying the strongest quarter-on-quarter growth in hiring expectations in Europe.
Small and medium-sized companies were particularly optimistic about their willingness to take on more staff.
The UK economy has been in the doldrums, but optimists would likely have seized on a slew of moderately positive data to suggest we were turning a corner.
Looking at the data alone, Bank of England rate-setters may have been moved to lower borrowing costs at its next meeting on 19 March, with wage growth continuing to near levels consistent with two per cent inflation.
Positive news would have set the Chancellor up for a rousing speech at Bayes Business School in London next week, which will focus on trade and technology, regaining control of her economic narrative.
So, spare a thought for the Chancellor as Trump took the spotlight once again.
UK economy on shaky ground
Although the US president indicated the war was “very complete”, Iran’s shapeshifting regime has vowed to fight on – and kept the few ship captains passing through the Strait of Hormuz on edge.
With oil prices elevated, analysts have scrambled to run through the different scenarios that could rattle the UK economy over the course of this year.
Rachel Reeves is almost back where she started last autumn when inflation remained well above target and the UK economy limped on month after month. Positive forecasts have now been withdrawn and business chiefs, particularly in the energy sector, have become more vocal about their contempt for the government’s approach.
One economist suggested the ONS’s economic updates were set to become “obsolete” should Trump’s war rage on while another consultancy said higher debt interest costs and price growth fears would wipe out her £23.6bn headroom.
The City’s optimism has all but faded despite some tech entrepreneurs’ efforts to keep growth efforts alive with huge funding rounds at data centre firm Nscale and autonomous driving business Wayve.
Labour officials are doing all they can to stay the course. While already dire economic forecasts are likely to be downgraded as a result of turmoil in the Middle East, opinions of what makes for a poor result are relative. Independent firms’ growth estimates for this year span widely between a slow expansion of 0.7 per cent to the more optimistic 1.4 per cent.
The Treasury is not willing to budge on fiscal policy until the Budget, so the pressure has now fallen on civil service teams working across energy, trade, defence and welfare to make better use of the cash they’ve got – and to come up with better ideas. The Bank of England will also have to clearly signal their policy intentions – are higher interest rates in the realm of possibilities? – or risk ambushing markets with shock decisions.
Government ministers and advisers are desperate to trumpet even the mildest signs of growth wherever they spot it. But what’s to come for the UK economy is unlikely to give cause for celebration.