UK Economy Contracts 0.1% in April Amid Iran War Impact

The United Kingdom’s economy contracted by 0.1% in April, marking its first monthly decline since August 2025 [1]. The downturn was primarily driven by a 0.2% decline in the services sector, which struggled under the weight of rising energy costs and the cancellation of major international sporting events linked to the ongoing war in Iran [1, 3].

Key takeaways

• The 0.1% contraction in April followed a period of growth earlier in the year, including a 0.6% rise in the first quarter [2, 3].
• Arts, entertainment, and recreation output fell by 4.3% as the cancellation of Formula 1 races and other events in the Middle East impacted UK-based firms [2, 3].
• Manufacturing output rose by 0.4% in April, providing a partial offset to the services sector decline [1].
• The International Monetary Fund has lowered its 2026 UK growth forecast to 0.8%, citing the country's vulnerability as a net energy importer [3].

Impact of Middle East Conflict on UK Services

The services sector, which accounts for a significant portion of the UK economy, faced broad-based pressure in April. Activity fell in eight of 14 services sub-sectors, with the most notable impact occurring in sports, amusement, and recreation, which saw a 9.1% decline [2, 3]. The Office for National Statistics (ONS) noted that the cancellation of Formula 1 Grand Prix races in Bahrain and Saudi Arabia, alongside other soccer and tennis events, directly harmed UK-based companies involved in these industries [1, 2].

Beyond the entertainment sector, the conflict has created a "headwind" for the broader economy through surging fuel and energy prices [3]. Companies in transportation, travel, and wholesale sectors reported reduced turnover, with many citing increased costs as a primary concern [3]. While manufacturing output saw a 0.4% increase—helped by a rise in pharmaceutical production and precautionary stock building—this was insufficient to prevent the overall monthly contraction [1, 2]. Additionally, industrial production remained flat, and health sector activity was further reduced by a junior doctors strike [2, 3].

Why it matters

The contraction signals a potential shift in the UK’s economic trajectory, with some analysts warning of a "damaging descent into stagflation" [3]. As a net energy importer, the UK remains particularly susceptible to global supply constraints caused by the war, which has now lasted over 100 days [3]. While headline inflation eased to 2.8% in April due to national energy price caps, households face further pressure as those caps are set to rise by 13% in July [3].

Looking ahead, Capital Economics expects the economy to stagnate through the second and third quarters as higher energy prices continue to erode household real incomes [2]. Consequently, economists suggest that the Bank of England is unlikely to raise interest rates at its upcoming meeting, as the current weakness in economic activity may keep rates unchanged for the remainder of the year [2, 3].