UK economy shrank in April as Iran war impacts growth

Britain’s strong start to the year came to an end in April as the impact of the Middle East shock began to filter through the economy.

Gross domestic product declined 0.1% following gains in the previous two months, the Office for National Statistics said Friday. The reading was in line with the median forecast of economists.

Services fell by 0.2%, offsetting gains in manufacturing and construction.
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The figures set the stage for a tepid second quarter as businesses and consumers grapple with higher energy costs and borrowing rates triggered by the Iran war.

It follows a bumper first quarter when Britain enjoyed the strongest growth of any Group of Seven economy. However, hopes of lower interest rates have flipped to expectations of hikes, while the boost to activity from businesses and households stockpiling to avoid higher prices in the early weeks of the conflict is beginning to fade.

The report will reinforce the case of BOE policymakers who appear reluctant to rush into interest-rate rises in response to the energy shock triggered by the Iran war. The decision over when or whether to raise rates is a trade-off between inflation and weak demand, with officials such as Andrew Bailey appearing to place more weight on the latter.

The slowdown also adds to the pressure on embattled Prime Minister Keir Starmer, who is facing the prospect of a leadership challenge in the coming weeks.