UK economy shrinks in April as Middle East conflict drags on activity

The UK economy went into reverse in April, contracting by 0.1% according to the Office for National Statistics, in the first monthly decline since last August. The drop followed growth of 0.3% in March and 0.4% in February, and underlined how quickly momentum has faded as global tensions spill over into domestic activity.

The fall was driven by the services sector, by far the largest part of the economy, while production was broadly flat and construction posted a modest gain. Despite the monthly setback, the broader picture remained marginally positive, with output up 0.7% across the three months to April, a reminder that single-month readings can be volatile and prone to later revision.

Coming after a run of encouraging prints earlier in the year, the figure landed awkwardly for ministers who had begun to point to a tentative recovery. It also sharpened the dilemma facing the Bank of England, which must weigh fragile growth against the inflationary pressure flowing from higher energy costs.

Conflict cited by businesses

The ONS said a number of firms had pointed directly to the outbreak of conflict in the Middle East, which began at the end of February, as a factor weighing on April's figures. Manufacturers, wholesalers, hauliers and travel and accommodation operators all reported reduced turnover, while rising fuel and energy costs added to pressure on margins.

Supply chains running through the region have been particularly exposed. Shipping operators have rerouted vessels away from the most affected waters, lengthening journey times and pushing up freight and insurance costs. Those increases ripple outward, raising input prices for importers and squeezing the cash that businesses might otherwise put towards stock, staff or investment.

“The outbreak of conflict in the Middle East has been cited by various businesses in terms of the April data.”

— Office for National Statistics

Sectors most directly tied to discretionary spending felt the chill first. Hospitality and travel firms reported softer bookings as households grew more cautious, while some manufacturers paused or slowed output in the face of pricier energy and uncertain demand.

Services lead the fall

Because services account for around four-fifths of UK output, even a small wobble in the sector can tip the headline figure negative. In April, consumer-facing services bore the brunt, with retailers, restaurants and leisure operators all reporting weaker trade than in the spring of the previous year.

The breakdown of where the weakness showed up matters as much as the headline number. The main contributors to April's decline included:

• Consumer-facing services, where softer demand for travel, hospitality and leisure dragged on activity
• Wholesale and distribution, hit by higher transport and fuel costs
• Some manufacturing sub-sectors, where energy-intensive production was scaled back
• Subdued business services, as firms delayed discretionary projects amid uncertainty

Construction provided a rare bright spot, helped by infrastructure and repair work, while the broad production category was little changed on the month. Economists noted that the composition of the fall was consistent with a one-off shock rather than a deep, broad-based deterioration.

What economists make of it

Economists cautioned that the figures may overstate the weakness of the underlying economy, given the unusual one-off nature of much of the disruption. Monthly GDP data is notoriously noisy, and the ONS routinely revises early estimates as more complete information arrives from businesses.

“A single negative month does not make a downturn, but it does show how quickly external shocks can feed through to domestic output.”

— An independent economist

Even so, the data has sharpened concerns that a combination of geopolitical shocks, higher energy bills and subdued consumer confidence could keep growth painfully slow through the summer. Several forecasters trimmed their near-term projections, while stressing that much depends on whether tensions in the Middle East ease or escalate further.

Background

The UK economy has spent much of the past two years grinding through a period of weak growth, with output barely above its pre-pandemic level on a per-head basis. High borrowing costs, sticky inflation and cautious households have all weighed on activity, leaving little spare capacity to absorb fresh shocks.

The conflict that erupted in late February has added a new layer of uncertainty, principally through its impact on energy prices. As an importer of much of its gas, the UK is acutely sensitive to swings in global wholesale markets, and the pass-through to household bills and business costs has been swift.

What happens next

Attention now turns to the May and June figures, which will show whether April was a blip or the start of a more sustained slowdown. A swift rebound would support the view that the dip was driven by temporary disruption; a second weak month would raise the spectre of stagnation. The Bank of England's next decision, and the path of energy prices over the summer, are likely to prove decisive for the rest of the year.