UK output slips 0.1% in April as energy shock hits activity

The UK economy contracted 0.1% in April, the Office for National Statistics said on Friday, matching the month-on-month decline economists surveyed by Reuters had expected. The fall interrupted a stronger start to the year, after GDP rose 0.3% in March, 0.4% in February and was flat in January.

The ONS said services output fell 0.2% and was the main drag on the monthly figure. Construction output rose 0.1%, partly offsetting the decline, while production was unchanged.

The figures give investors and policymakers an early reading on how the conflict involving Iran is feeding into a net energy-importing economy through higher costs and disrupted activity. Several businesses told the ONS that the Middle East conflict had weighed on April turnover, particularly through energy and fuel prices.

Services bore the largest hit

The sharpest single industry drag came from sports, amusement and recreation activities, where output dropped 9.1%, according to the ONS. The agency said the category made the largest negative contribution from any one industry to both services output and real GDP growth in April.

The ONS linked part of that weakness to the cancellation of sporting events in the Middle East, which affected output at UK-based companies. Firms in manufacturing, wholesale, transportation support and travel agencies also reported that the regional conflict had reduced turnover during the month.

“A common theme of the comments received was the increase in prices because of the Middle East conflict,” the ONS said. It added that the comments mainly concerned energy and fuel costs, with some firms reporting an effect in April and others indicating potential effects in later months.

Energy costs complicate the rate debate

Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales, said the data made a Bank of England rate cut the following week unlikely. He described the GDP fall as pointing to a “damaging descent into stagflation.”

Thiru said the April decline was “the first economic blow landed by the Iran conflict,” citing weaker fuel sales and a slowdown in services. He said “skyrocketing fuel costs” had changed the UK’s growth path, after fuel had supported activity in March when motorists brought purchases forward before cutting consumption as pump prices rose.

The war has tightened global energy supply, contributing to renewed inflation pressure. The International Monetary Fund warned in April that the UK could suffer the largest growth hit from the conflict among major economies, in part because it imports more energy than it exports.

The IMF now expects the UK economy to expand 0.8% in 2026, down from a 1.3% forecast made at the start of the year.

UK headline inflation eased to 2.8% in April, a move attributed largely to the national energy price cap set by Britain’s energy regulator. From July, that cap is due to rise 13%, allowing suppliers to pass through some of the higher oil and gas costs to customers.

This story draws on original reporting from CNBC Economy.