Well, that was another interesting weekend. After re-opening the crucial Strait of Hormuz on Friday, which prompted a 10% drop in oil prices, Iran announced it was closed again on Saturday and the US seized an Iranian ship on Sunday. Oil prices are up 5% this morning at around $96 per barrel (pb), well above their pre-crisis $60−$70pb range, but still below the $100pb+ they’ve been at since mid-March.

Crucially, the number of ships transiting the Strait has dropped back to near zero after spiking to 10 on Friday. The pre-crisis average was about 60 a day. This all keeps the risk very much alive that energy prices will go much higher and that the energy rationing we’re seeing throughout Asia could begin in Europe.

Yet, the fact oil prices are back below $100pb and financial markets have rallied globally is positive for the UK, even if it is a little hard to square markets’ optimism with the reality on the ground. The key piece of data this week will be whether the ceasefire is extended and under what terms. Hopefully, I will have some good news to write about on this next week.

Will energy prices erase early 2026 UK economic growth?

For now, and away from the Middle East, the UK economy was much stronger at the start of the year than we previously thought. Growth was 0.5% m/m in February. This means it grew by a cumulative 0.6% in the first two months of the year alone. Of course, that rate won’t last into Q2 given the conflict in Iran. But, it does mean the economy went into the crisis on a better footing than expected. What’s more, it suggests that if there’s a lasting ceasefire and oil prices fall back, then a recovery to the outlook will happen relatively quickly.

However, as we set out last week, even if the Strait re-opens and ships are confident enough to start transiting, it will take months for energy flows to return to normal. That means prices will remain higher than their pre-crisis levels for the rest of the year. There’s already an inflationary hit built in as fuel and utility prices adjust to the new level of wholesale prices and firms contend with supply-chain disruptions. This will put a dent in households’ real disposable income (RHDI), which is household income adjusted for inflation. In theory at least, this poses a risk for consumer spending and consumer-facing businesses, such as retail and hospitality.

Even before the Iran crisis, we’d forecast RHDI to only grow modestly this year at roughly 0.5%. This was because we thought inflation would stabilise at around 2.5%, while the higher tax burden and weaker labour market would weigh on nominal incomes. So, there’s a good chance now that real household disposable income growth is flat or even slightly negative. In a previous note, we mapped out how much real incomes could drop under different scenarios.

UK households can smooth spending

The good news, though, is that the depressed outlook for RHDI doesn’t have to mean consumption will be equally as weak. After all, households are saving almost 10% of their income and could use some of this to smooth through the shock. During 2022, households slashed the proportion of income they were saving to a low of just 3.8% in Q2. Excluding pension contributions, the savings ratio actually turned negative in Q2 and Q3 2022 as households used their rainy-day funds to support consumption.

Unfortunately, it’s still inevitable that there will be a hit to demand. Not all households will be able to or will want to decrease saving. Employment will also probably be weaker than we previously thought as firms look to reduce costs. There’s unlikely to be a significant government bailout this time either. But, if energy prices stay around current levels and households in aggregate save a bit less, then the hit to the economy should be smaller than we feared a couple of weeks ago. That points towards stagflation-lite rather than a repeat of 2023.

We anticipate Tuesday's data will show the labour market remained soft in February.

Private sector pay growth excluding bonuses, the measure most relevant to the Monetary Policy Committee (MPC) because it’s more reflective of underlying pay pressures, should ease to 3.2% 3m/y/y%. That’s in line with the MPC’s view of target-consistent pay growth. Beyond the latest data, private sector surveys signal wage growth will stabilise around 3.25−3.5% later this year.

The unemployment rate will show signs the labour market was stabilising in Q1 before the conflict in Iran disrupted the outlook. We expect it to hold steady in February at 5.2%.

More importantly, payrolls will give us the first sign of how the jobs market fared in March. However, firms are unlikely to have adjusted hiring plans instantly, so we expect a 10k gain in payrolled employment.

Further ahead, the Iran crisis means the labour market will remain weaker as firms slow hiring in response to squeezed profit margins and weaker demand. This means we now expect unemployment to peak at around 5.5% this year.

For interest rates, job market weakness makes it less likely the MPC will raise rates because it won’t want to worsen the malaise, especially as interest rates can do little to dampen higher inflation that’s due to energy prices.

We expect Wednesday's data release will show inflation rising to 3.3% in March from 3% in February.

Almost all the acceleration will be driven by motor fuels, where we expect inflation to surge to 5% y/y from -4.6% y/y previously.

Airfares inflation will also pick up sharply as this year’s earlier Easter means airfares will be stronger in March compared to last year. This will unwind again in April’s data.

Looking ahead, inflation will drop back in April to around 3% as measures to cut household energy bills and base effects from last year’s regulated price hikes weigh on the figures. Admittedly, that’s sharply higher than it would have been before the Iran conflict when our forecast was for inflation to ease to around 2.2% in April. Further ahead, higher energy prices mean inflation rises back towards 3.5% in July as the energy price cap resets higher.

We expect retail sales to have dropped slightly in March when the latest numbers are published on Friday.

The onset of the conflict in Iran likely means that retail sales were weak as higher fuel prices and elevated uncertainty prompted consumers to begin cutting back. That said, we expect the drop to be moderate as consumers take time to adjust their spending patterns.

Indeed, the GfK consumer confidence index dropped to -21 in March. That’s its lowest since April 2025 when households were hit with a range of tax hikes and regulated price increases.

Admittedly, Barclays monthly card-spending data shows retail outlay rising to 1.6% y/y from 1.3% y/y in February. The BRC figures show an even bigger surge. However, this data is not seasonally adjusted and Easter fell earlier in 2026 than in 2025, which likely flatters these figures.

All told, we think retail sales will show consumers holding off on spending in the wake of the uncertainty caused by the conflict in the Middle East. This will likely accelerate in the coming months as fuel prices surged higher in April.

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