UK GDP slips 0.1% in April as Iran war hits services and fuel costs

The U.K. economy contracted 0.1% in April, according to figures published Friday, giving investors another sign that the Iran war is feeding into growth through higher costs and weaker activity. Gross domestic product, or GDP, measures the value of goods and services produced by an economy, and a monthly drop can affect expectations for company earnings, inflation and interest rates.

The Office for National Statistics said services output fell 0.2% in April, making it the main drag on growth. Construction output rose 0.1%, partly offsetting that decline, while production output was flat.

The reading matched the 0.1% month-on-month contraction expected by economists surveyed by Reuters. It also broke a stronger start to the year: GDP rose 0.3% in March and 0.4% in February after showing no growth in January.

Services took the main hit

The largest single industry drag came from sports, amusement and recreation activities, which fell 9.1%, according to the ONS. The statistics agency said that category made the biggest negative contribution from one industry to both services output and real GDP growth.

The ONS said some of that weakness was linked to the war, because the cancellation of sporting events in the Middle East reduced output for U.K.-based companies.

Companies in manufacturing, wholesale, transportation support and travel agencies also told the ONS that the Middle East conflict had hurt turnover in April. Turnover refers to the sales a business records over a period.

The ONS said many business comments pointed to higher prices caused by the conflict, especially energy and fuel costs. Some companies said they had already felt the effect in April and expected further pressure in later months.

Why fuel prices matter for rates

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

Stagflation means weak or falling growth at the same time as prices keep rising. That is difficult for central banks because lower interest rates can support activity, while higher rates are usually used to slow inflation.

Thiru said the Iran conflict had delivered its “first economic blow” to Britain, with lower fuel sales and slower services activity stopping the country’s early-year momentum. He also said surging pump prices had changed the growth picture, after motorists brought purchases forward in March and then cut consumption in April.

The U.S.-Iran war recently passed the 100-day mark and has created supply constraints in global energy markets, according to CNBC. Those constraints have contributed to renewed inflation pressure.

The International Monetary Fund warned in April that the U.K. could suffer the largest growth hit from the war among major economies. The IMF now expects U.K. GDP to grow 0.8% in 2026, down from its earlier forecast of 1.3% at the start of the year.

Britain is a net energy importer, which makes it more exposed when global oil and gas prices rise. Higher imported energy costs can squeeze households through bills and fuel prices, while also raising expenses for companies that transport goods, run factories or sell travel services.

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

This story draws on original reporting from CNBC.