(June 12): The UK economy contracted for the first time in eight months, an early sign of the damage wrought by war in Iran.
Gross domestic product declined 0.1% in April following gains in the previous two months, the Office for National Statistics (ONS) said on Friday. The reading marked the first decline since August 2025 and was in line with the median forecast of economists.
Services fell by 0.2%, with some firms hit by the cancellation of sporting events in the Middle East, the ONS said. The drop outweighed a 0.1% gain in construction and a 0.4% increase in manufacturing.
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 are beginning to fade.
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The report will reinforce the case of Bank of England (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 Governor 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.
“This is not a war we wanted or joined, but one that will have an impact at home,” Chancellor of the Exchequer Rachel Reeves said, responding to Friday’s figures.
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Businesses said the conflict in the Middle East hit activity in April. Manufacturing, wholesale, warehousing, transport, accommodation and travel agencies all said the war had reduced turnover. Firms more broadly also expressed concerns about the increase in prices caused by the conflict.
The powerhouse services sector was dragged down by administrative and support activities, which fell 2.2% on the month. Arts and entertainment also declined sharply, as some British businesses were impacted by the cancellation of sporting events in the Middle East, like Formula One in Bahrain and the Saudi Arabian Grand Prix, the ONS also said.
Consumer-facing services also declined on the month, adding to evidence that the all-important British consumer is starting to feel the squeeze from the energy shock. Sport and recreation activities dropped 9.1%, while retail trade also contracted.
It chimes with recent official figures showing retail sales falling at the sharpest pace in over a year due to Britons making fewer car journeys to save on fuel. From clothes to home items, households pulled back spending across all categories except food in April.
“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,” Fergus Jimenez-England, associate economist at NIESR, said. “That said, we expect the Bank of England to leave interest rates unchanged at next week’s meeting.”
“The outlook for Britain’s economy is fragile. Higher fuel prices and tighter funding conditions seem to be already dragging on activity, yet the full heat from the Iran war has yet to be felt. Household utility bills will rise by 13% in July and the jobs market should continue to loosen ahead. That backdrop will help curb risks of more persistent price pressure and explains why the BOE is in no rush to lift rates. We expect it to hold at its June meeting. Still, with headline inflation set to accelerate to 3.5% by the end of the year, it’s unlikely to be enough to convince it to stay put. Our base case is the central bank will deliver a one-and-done 25-bp hike in July,” say Matt Bunny and Ana Andrade, economists at Bloomberg Economics.
US President Donald Trump has claimed a deal with Iran is close as he pulled back military strikes against the country. However, policymakers remain concerned that damage to key energy infrastructure could have lasting economic consequences, even if the conflict is brought to a swift end.
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For British businesses, the fallout comes on top of headwinds at home. Firms are dealing with worsening wage pressures, after Labour’s tax hikes and another large increase in the minimum rate this year.
Demand remains fragile, as inflation is eroding pay growth and households rein in spending in preparation for higher energy costs. Wage rises are harder to come by, and so are new roles, as firms accelerate job cuts.
Adding to domestic turbulence is also the prospect of another change in prime minister — and in policy. Starmer’s position is looking increasingly fragile after devastating losses at local elections last month, and some rivals are already signaling they are ready to challenge him for the top job.
More recent survey data showed the economy cracking under pressure from the Iran war and political drama in Westminster. The private sector contracted for the first time in over a year in May, according to S&P’s business survey, as firms reported low confidence, particularly in the services sector.
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