Downbeat GDP before conflict

Data from the Office for National Statistics (ONS) published on 13 March, revealed that in January 2026 monthly GDP showed no growth, down from growth of 0.1% in December and 0.2% in November 2025.

The data confirmed that the services sector showed no growth and production fell by 0.1%. However, construction grew by 0.2%.

Suren Thiru, ICAEW Chief Economist, said: “These figures confirm that the economy was treading water even before the significant economic shock unleashed by the Middle East conflict took hold, as weak services and industrial activity helped suffocate overall output in January.”

While the UK could have returned to modest growth in February, aided by a stronger manufacturing and services output, the Middle East conflict has put paid to that.

Thiru said: “Any lingering momentum in the economy has evaporated by now with the energy crisis and supply chain disruption pushing both the UK closer to stagflation and eroding the Chancellor’s fiscal headroom.”

Labour market exposed

ONS monthly data on UK labour market figures, confirmed that the UK’s labour market headed into the energy crisis in a fragile state as a stagnating economy and skyrocketing staffing costs continue to compel businesses to curb recruitment and limit salary settlements.

Thiru said: “This slowdown in earnings growth will likely gain impetus in the coming months as the growing financial squeeze on firms from surging energy costs further restricts pay rises, despite upward pressure from next month’s minimum wage increase.”

He warned: “The UK’s jobs market is painfully exposed to the fallout from the Iran war as hiring intentions already weakened by soaring labour costs will likely deteriorate further as higher energy bills start to bite, pushing unemployment close to 6%.

Hawkish interest rates hold

The Bank of England’s Monetary Policy Committee decision to hold interest rates was no surprise given the current situation, however, it will have come as a bitter blow to home buyers grappling with the striking hike in mortgage rates since the Iran war started and businesses toiling against elevated cost pressures.

“The vote split suggests that this was a hawkish rate hold, highlighting how recent divisions within the committee have faded for now amid a wave of new inflation risks and uncertainty caused by this Middle East conflict,” said Thiru.

“While policymakers will want to avoid a repeat of 2022 when it raised rates too late to stop inflation surging, following Russia’s invasion of Ukraine, they should be careful not to overcorrect for past mistakes as this time policy is more restrictive and inflation is lower, leaving rate-setters favourably positioned to cope with this crisis.”

Looming inflation surge

Data from the ONS on 25 March 2026, confirmed that inflation was unchanged in February, however, Thiru warned that this was a false flag for the economy as these figures pre-date the energy shock induced by the Middle East conflict and the subsequent financial pain facing consumers and businesses.

“Though elevated services and core inflation means the UK is more vulnerable to the inflationary fallout from the Iran war, as it confirms that underlying price pressures were already stubborn entering this crisis, the squeeze from higher unemployment should limit any second-round effects,” said Thiru.

“While inflation should fall next month as the cut to green levies temporarily lowers energy bills, a brutal inflation surge looms with skyrocketing oil and gas costs likely to lift the headline rate above 4% by the summer.”

Reflecting on the interest rate hold earlier in the month, Thiru said: “Though the hawkish tilt to last week’s policy decision means another interest rate cut this year currently looks impossible, the likelihood of rate rises has been dramatically overstated as the damage to growth from the conflict will likely lower inflation over time.”