Rachel Reeves blames Iran war as UK economy shrinks in April

Rachel Reeves blames Iran war as UK economy shrinks in April Expert says more chance of England bringing home the World Cup trophy than the Bank of England raising rates next week as figures show the UK economy fell 0.1% in April Chancellor Rachel Reeves blamed the fall-out from the Middle East war as figures revealed the UK economy went into reverse in April. The Office for National Statistics said gross domestic product - the value of everything the country churns out - declined by 0.1%, in a sharp reversal from growth of 0.3% in March and 0.4% in February. Ms Reeves said: “Before the conflict in the Middle East, growth was higher than expected and inflation was falling. This is not a war we wanted or joined, but one that will have an impact at home. “Our economic plan is the right one, with both the IMF (International Monetary Fund) and OECD (Organisation for Economic Co-operation and Development) upgrading their forecasts for growth recently. "The choices I have made as Chancellor mean our economy is in a stronger position to deal with the costs of the war, and we are getting on with the job of building a stronger and more secure economy.” The decline was driven by a 0.2% fall in services, which was partially offset by a 0.1% rise in construction and 0.4% growth in manufacturing. Over the less volatile three months to April, the economy grew by 0.7%. The ONS said the all-important service sector performance was hit partly by a 4.3% drop in arts, entertainment and recreation, with the sports industry industry seeing a 9.1% contraction in output as a raft of sporting events in the Middle East were cancelled due to the conflict. It is the latest signal that the Iran war is squeezing some sectors, after recent official retail figures revealed sales fell at their fastest rate for almost a year, down 1.3% as soaring petrol and diesel prices hit fuel sales. The Bank of England is widely expected to keep its base rate on hold at 3.75% when its Monetary Policy Committee meets for its monthly vote on Thursday. Thomas Pugh, chief economist at audit, tax and consulting firm RSM UK, said: “The Bank of England will almost certainly hold interest rates at 3.75% at its meeting next week, most likely in a 7-2 vote. “Current market pricing implies England have about twice as much chance of bringing home the world cup trophy than the Bank of England does of raising interest rates next week.” He added: “Further ahead, we think a weakening labour market and deteriorating economic outlook will keep the Bank on hold this year, before cutting three times in 2027. But the risks are clearly weighted to at least one rate hike in the summer. The crucial point will be whether there is evidence of second-round effects emerging.” Experts believe that after an unexpectedly strong start to the year, when GDP grew by 0.6% in the first quarter, growth will progressively fade over the rest of 2026. Lib Dem Treasury spokesperson Daisy Cooper said: “Today’s figures show that Trump’s idiotic war, cheered on by Nigel Farage and Kemi Badenoch, is having a crushing impact on British families and businesses - yet the Government is asleep behind the wheel." TUC General Secretary Paul Nowak said: “Before Trump’s illegal war the economy was starting to get back on track. But global events are having a knock-on effect on living standards and growth. Families and businesses are still battling against an unending cost of living crisis, with rising petrol, energy and mortgage costs heaping pressure on budgets. “The government must get ahead and do everything in its power to shield families through this crisis. That’s why we are calling for an emergency social tariff which will cut bills for two thirds of households – funded by an increase in windfall tax on banks. The tariff would reduce inflation and put more money back in people’s pockets.” Stuart Clark, portfolio manager at Quilter, said: “Households and businesses alike have tightened their belts in the face of increasing costs and postponements of sporting events in the Middle East saw the services sector contract consequently. “While the three-month growth has held up, the first quarter of the year is looking very much like a false dawn, and with repeated resolutions between the US and Iran failing to pass, conditions are going to remain tough for longer still.” Rob Wood at Pantheon Macroeconomics is forecasting growth to slow to 0.2% in the second quarter and 0.1% in the third quarter. But the Item Club warned the UK could be left “flirting with recession”. Matt Swannell, the Item Club’s chief economist, said: “The rising price of household essentials, combined with a deteriorating jobs market, will squeeze households’ spending power. “Meanwhile, elevated input costs, tighter financial conditions and lingering geopolitical uncertainty will cause businesses to put some investment decisions on hold.”