There has been enough doom and gloom to last a lifetime during March and April, and with good reason. There may be plenty more to come in 2026 if energy prices go higher and we are plunged into another bout of confidence sapping political drama. Needless to say, then, the risks are high. But there are also reasons to think the economy is holding up in the face of the latest shock. That doesn’t mean there won’t be an economic hit from the latest crisis, but it raises the chances of stagflation-lite rather than a recession.

The UK economy is holding up better than expected

The latest economic activity data for March was surprisingly positive. The economy grew by 0.3% in March, despite the eruption of the war in Iran and fuel prices surging. That comes on top of a 0.4% expansion in February, meaning growth in Q1 came in at an impressive 0.6%.

There was also little sign of consumers or businesses panicking at the outbreak of war. Hospitality services activity jumped as did the entertainment sector. Manufacturing and construction output both increased and business sectors, such as ICT and financial services, grew.

What’s more, the survey data we have had for April has largely been positive. Business surveys, such as the PMI, have risen or been stable suggesting things aren’t falling off a cliff.

Admittedly, the war could, ironically, be boosting the recent data. Consumers and businesses have brought forward some activity to avoid price rises and worries about supply shortages. For example, petrol sales jumped by 6.1% in March as drivers filled up ahead of price rises and there is some evidence that manufacturers and real estate firms benefitted from the same effect.

But all in, the economy seems to have been fine at the start of the war. In fact, the economy has been stronger over the last couple of years than widely acknowledged, at least compared to the previous two years.

Of course, it seems inevitable that the resilience will be short lived. Fuel prices continued to rise in April, and consumers will start to feel the effect on their wallets only from last month. Businesses who had been hoping there would be a quick “TACO” (Trump Always Chickens Out), meaning the war would be over soon will have to revise their expectations and their and investment and hiring plans.

Optimism despite inflation and energy price risks

Despite the doom and gloom, let’s explore a more optimistic road. There are two key reasons why the hit to the economy could be much smaller than some think.

First, oil prices of $100pb don’t have the same economic impact as they did back in 2008 or even before the pandemic. That’s partly because the oil intensity of the economy - the amount of oil it takes to generate each unit of GDP – has fallen by around a quarter since 2011, and 40% since 2000. But also because the real price of oil is lower than it used to be. In other words, the cost of everything else has gone up by even more than oil, making it relatively cheaper. For example, oil would need to rise to around $140 to be the same in real terms as the $120pb peak following the invasion of Ukraine. That means unless oil prices go much higher, the hit to the economy should be manageable.

Second, the actual hit to the economy depends on the responses of households and businesses. Households, on aggregate at least, come into the crisis saving around 10% of their incomes, which gives plenty of room to save a bit less in order to absorb the hit from higher fuel prices rather than immediately cutting spending. Indeed, this is exactly what happened in the last energy crisis when the saving rate dropped from 7.5% to 3.8%. Our own proprietary consumer survey research backs this up with a 7ppt rise in the proportion of consumers saying they will save less. If households and businesses largely view the fuel price shock as temporary and smooth through it, the hit to growth could be relatively minor. For the time being, at least, the data suggests consumers are treating this more like a temporary blip than a permanent reduction in their spending power.

The risks are clearly to the downside. The longer the war goes on, the more likely energy prices will rise and consumers and businesses will adjust their spending and investment. Throw in a prolonged bout of political uncertainty, given that Andy Burnham will have to win a tough by-election before the labour leadership contest can even start in earnest. It also still looks likely that growth will slow sharply after Q1’s strong start, but the most recent data suggests a recession is not yet a done deal. We’ll learn more with this week’s data dump, read our preview articles to see what to expect.

Tuesday’s labour market data will show a jobs market that was weak but stabilising in the first month of the Iran war.

The unemployment rate will probably drop to 4.8% in March from 4.9%, but will reassert its upwards trend in the coming months as higher energy costs and weaker consumer spending squeeze firms’ margins and prompt a slowdown in hiring.

Private sector pay growth excluding bonuses, the measure most relevant to the MPC as it is reflective of underlying inflationary pressures will probably ease to 3.1% from 3.2%, as the weaker labour market continues to feed through to pay growth.

That said, pay growth is now undershooting most private sector surveys and pay settlements for the year have largely been agreed before the start of the Iran war, so we see a decent chance of pay growth rebounding to around 3.5% this year.

In any case, the labour market is too weak, and will weaken further this year, which means employees will struggle to bid up nominal wages to the same extent that they did following the war in Ukraine when wage growth peaked at over 8.0%. This is a big reason that we think the Bank of England may not need to hike rates to the same extent as investors currently expect this year.

Inflation will probably ease to 3.0% in April from 3.3%, but this will be a temporary blip as energy prices continue to push up on inflation.

The slowdown is two-fold. First, the government took measures at the budget to cut household energy bills which took effect in April and also froze rail fares which will cause inflation to slow. Second, prices rose sharply in April 2025 due to a smorgasbord of regulated price and tax hikes which will now fall out of the annual comparison. In fact, we had expected inflation to slow close to 2.0% in April before the war in Iran upended the outlook.

However, motor fuel inflation will surge to 23.2% from 4.9%, offsetting almost all of the disinflation we had previously expected in April.

All told, inflation will ease in April but this will be little respite for consumers who are now dealing with surging fuel prices and will see a big hike to the energy price cap in July that lifts inflation back above 3.5%.

Retail sales will likely dip in April as the war in Iran starts to bite.

March retail sales (+0.7%) were driven by consumers loading up on fuel, which looks set to unwind as weekly data from the ONS suggests consumers were buying 10% less fuel per transaction by the end of April. Consumer confidence in younger cohorts has also fallen more quickly than that of older consumer’s and generally provide a better steer for retail sales, suggesting a sharp decline in the coming months.

That said, retail sales may be more resilient than expected. April was the fourth sunniest on record and rainfall was below average which led to footfall being broadly unchanged month to month. What’s more, the major purchasing intentions balance of the GfK consumer confidence survey, which is a better indicator of spending intentions than the headline, held at -18 in April despite the headline collapsing to -25 from -21.

Ultimately, payback for surging fuel sales in March means that retail sales will drop back in April, but we expect the sales excluding fuel to hold up slightly better even if still weakening.

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