The Iran war was completely unexpected at the start of the year, and has killed any burgeoning signs of economic recovery in the UK. The energy impacts of the war will become apparent in July, when the OFGEM energy price cap increases, according to Suren Thiru, ICAEW’s Chief Economist. Consumers and businesses will feel the pinch as a result.

The memorandum of understanding between the US and Iran was a promising first step towards a peace deal, but renewed tensions risk further weakening an already fragile economy. 

“Unfortunately, we’re still likely to see high inflation and weak growth over the next six months,” says Thiru.

Questions over interest rates

At the start of the year, Thiru expected the Bank of England to cut interest rates. That expectation was blown out of the water once the conflict began. Although rates haven’t risen at the midway point of the year, the Bank of England expects it to rise over the next six months.

“UK monetary policy currently sits at a crossroads as while the US-Iran memorandum of understanding had raised hopes that inflation could ease without further tightening, the return to hostilities could quickly tilt the balance back towards rate hikes.,” says Thiru.

New PM, new strategy?

The result of the Makerfield by-election and the resignation of Sir Keir Starmer, raises the question: what are the economic implications of a new prime minister?

Thiru says: “As we move to the autumn, we’re likely to see the government’s spending decisions and policies come more into focus, particularly as we come to the budget, in October or November.”

There would be particular scrutiny of a new government’s ‘tax and spend policy’, he thinks.

“A new prime minister will potentially have a very different view of the economy,” says Thiru. “That will clearly have an impact, but also on things like the financial markets and the ability of the government to borrow.”

The change of leadership does mean the possibility of another delayed Budget, which risks more market speculation and delayed spending decisions until any likely tax changes become clearer. The swift transition of power, with Andy Burnham likely to step in as prime minister as early as the end of July, should help deliver some certainty.

The markets will be looking closely at those early weeks to seek reassurance. Thiru says:  “We saw that a couple of years ago with Liz Truss’ Mini Budget – there was a lot of volatility in the financial markets. There's a risk we could see some of this again, if financial markets don't believe that the government has a credible plan to support the economy going forward.”