Prolonged Iran conflict and Labour leadership battle raise recession risk, say economists
The economy grew by more than expected in March, capping off a strong first quarter.
However, economists say the prospect of a prolonged conflict in the Middle East and the uncertainty of a Labour leadership contest at home raise the risk of a recession.
GDP increased by 0.3 per cent in March, the Office for National Statistics said, with the economy expanding by 0.6 per cent in the first quarter of the year.
It suggests that businesses and households are treating the oil price shock as temporary, but economists say that the prolonged closure of the Strait of Hormuz has darkened the outlook for the British economy.
The figures, which came ahead of expectations, show the economy is more resilient than many had first thought. However, ‘the bad news is that this measurement is mostly behind us,’ says George Lagarias, chief economist at Forvis Mazars.
‘We are already in the middle of the second quarter, where the impact of the closure of the Strait of Hormuz and higher inflation eating into growth will be more felt,’ he adds.
That has already been reflected in survey data from businesses, which show that momentum has softened amid supply disruptions.
Recession looms: Political uncertainty and Iran war ‘darken’ the near-term economic outlook
Peel Hunt has slashed its GDP forecast from 1.3 per cent to 0.8 per cent for the year, in line with the IMF, as ’emerging risks have weighed badly on the outlook’. It expects growth to ‘slow to a crawl’ this summer as inflation climbs towards four per cent.
The stronger-than-expected GDP figures could also reflect seasonal adjustments. Raj Badiani, economics director at S&P Global Market Intelligence, said the stockpiling of goods sparked by the Iran war may also have pulled forward demand in March.
ING economist James Smith also raised questions about seasonal adjustments to the data – ‘it seems that something’s not quite right… a legacy we suspect of higher inflation and the timing of annual price hikes,’ he said.
It leaves a difficult backdrop for the Government as energy costs rise and gilt yields spike, ‘underlining how little tolerance markets currently have for political uncertainty when the UK’s fiscal position is already so constrained,’ says Lindsay James, investment strategist at Quilter.
Kallum Pickering of Peel Hunt warns that the ‘noisy’ leadership contest will see the near-term outlook ‘further darkened’.
If Sir Keir Starmer is replaced with a leader who is further to the Left, it raises the prospect of ‘even more damage to growth potential coming from excessive regulatory policies and further tax rises to fund an ever-more bloated public sector,’ he says.
The combination of higher energy prices and nervousness in the financial markets over a possible change in Prime Minister raises the risk of recession.
Luke Bartholomew, deputy chief economist at Aberdeen Investments, says: ‘The ongoing political uncertainty is likely to weigh on investment given the possibility of a significant change in fiscal policy. So the risk of a recession later this year is elevated’.
Meanwhile, Badiani of S&P Global Market Intelligence now expects the economy to contract ‘mildly’ in the second and third quarters of the year, citing a rise in inflation and pressure on the Bank of England to raise interest rates.
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