Iran conflict to weigh on UK Q2 growth – ‘fairly marked slowdown’ expected

The escalating Iran conflict is expected to weigh on UK economic growth in the second quarter of 2025, with economists forecasting a ‘fairly marked slowdown’ as geopolitical tensions disrupt trade and energy markets. The warning comes as businesses face rising costs and supply chain uncertainty, threatening to derail the recovery from the recent mild recession.

What is driving the slowdown forecast?

Analysts point to several channels through which the Iran conflict could dampen UK GDP growth. The most immediate impact is likely through higher oil and gas prices, which increase production costs and reduce household spending power. Additionally, disruption to shipping routes in the Middle East could delay imports and raise freight costs, particularly for energy-intensive industries.

According to a recent note from a leading economic consultancy, the UK’s growth rate could slow to around 0.1% quarter-on-quarter in Q2 2025, down from an estimated 0.4% in the first quarter. The note describes the slowdown as ‘fairly marked’ but stops short of predicting a recession, citing resilience in the services sector.

How might the conflict affect UK households and businesses?

For households, the main risk is higher inflation, especially in energy bills and food prices, which could squeeze real incomes and dampen consumer spending. Businesses, particularly in manufacturing and logistics, face higher input costs and potential delays in receiving goods.

The Bank of England is monitoring the situation closely. While interest rates are currently on hold, a sustained rise in energy prices could complicate the path back to the 2% inflation target. Some economists suggest that the Bank may need to keep rates higher for longer if the conflict persists.

What are the broader implications for the UK economy?

The slowdown comes at a politically sensitive time, with the government under pressure to deliver growth. The conflict also poses risks to public finances, as lower growth reduces tax revenues while higher energy costs could increase spending on support schemes.

However, the UK is less dependent on Middle East oil than in previous decades, and the economy has shown resilience to external shocks. The full impact will depend on the duration and intensity of the conflict, as well as the response of other major economies.

Conclusion

In summary, the Iran conflict is expected to cause a ‘fairly marked slowdown’ in UK Q2 growth, primarily through higher energy prices and trade disruption. While a recession is not the base case, the risks are tilted to the downside. Policymakers and businesses will be watching the situation closely, and the outlook remains highly uncertain.

FAQs

Q1: How will the Iran conflict affect UK GDP growth?
The conflict is expected to slow UK GDP growth in Q2 2025, with forecasts of around 0.1% quarter-on-quarter, due to higher energy costs and trade disruption.

Q2: What are the main channels of impact on the UK economy?
The main channels are higher oil and gas prices, increased shipping costs, and supply chain delays, which raise costs for businesses and reduce household spending power.

Q3: Could the slowdown lead to a UK recession?
Most economists do not expect a recession, but the risk is elevated. The outcome depends on the duration of the conflict and the response of monetary policy.