UK economic growth wavered in April; however, it's not as bad as the headline figures suggest. Much of the weakness can be explained by one-off events and even if the economy were to stagnate in May and June, growth in Q2 would still come in at 0.2%. Therefore, we doubt today’s data will have little impact on the MPC’s meeting next week. Looking ahead, growth will slow across the rest of the year as higher inflation eats into real household incomes, and higher borrowing costs and persistently elevated uncertainty all drag on activity, even if a deal in Iran is reached soon.

UK GDP falling but not as bad as headlines suggest

The UK economy contracted in April, with GDP falling by 0.1%, the first contraction in GDP since August 2025.

Much of this is a result of the Iran crisis, for example retail and wholesale activity fell by 0.4%. As fuel sales collapsed by 10.2%, lopping 5bps off GDP. Households had stocked up on fuel in March ahead of price rises which meant demand was always going to be weaker in April.

The Middle East crisis also dragged recreation activity, down by 4.3%. Events in the Middle East, such as the Saudi Arabia and Bahrain Grand Prixes, were cancelled which had a knock-on impact on UK-based teams and broadcasters.

That said, manufacturing activity continues to benefit from firms pulling forward their production ahead of price rises and potential supply shortages, growing by 0.4%. That said, manufacturing is more energy-intensive than other sectors, so we expect activity to weaken as front-running fades.

Some sectors seemed unconcerned by the crisis just yet. For example, hospitality grew by 0.5% m/m, in part due to better weather, and could also suggest that consumer confidence is holding up despite the current uncertainty.

Transport also grew by 1.4% despite tube strikes in April, although strikes did have an impact elsewhere with health output falling by 0.2%. The latter will rebound in May, supporting growth.

All told, the economy weakened in April but some of this can be attributed to the public sector strikes and fuel price frontrunning beginning to unwind, which means activity probably wasn’t as weak as the headline suggests. Indeed, even if the economy stagnates in May and June, growth will still come in at 0.2% in Q2. Therefore, this data is likely to have little effect on the MPC decision next week.

More stagnation coming soon

Further ahead, we think the economy will all but stagnate for the rest of the year.

First, inflation will take a step up to around 3.5% in July as the Ofgem energy price cap is hiked by 13%, which will drag on real household disposable incomes (RHDI). In fact, inflation will then continue to creep up close to 4.0% in the second half of the year as higher jet fuel costs push up airfares, and both fertiliser and diesel prices make their way through supply chains to push up food inflation, which means we expect RHDI to grow by just 0.1% this year.

Second, the latest Westminster ‘psychodrama’ will only add to the uncertainty created by the conflict in the Middle East, with ministers resigning over defence spending in the last few days and polls suggesting that Andy Burnham will win the Makerfield by-election, it now feels inevitable that Keir Starmer is ousted. This would likely lead to a repeat of the stop-start pattern of growth in the last few years continues where a strong start is followed by worries about tax hikes that drag growth to a halt in the second half of the year.

Third, the combination of higher inflation and concerns around a more spendthrift government has pushed up medium-term borrowing costs, sharply raising the cost of capital for firms. This will drag on business investment throughout the year and weigh on rate sensitive sectors such as Construction and Finance.

The silver lining is that households are saving close to 10% of their incomes which means there is scope for them to reduce saving to support consumption as they did in 2022, but if energy prices surge higher and stay there for longer, then households will start to slash discretionary spending.

Ultimately, we think growth will slow to around 0.8% this year, down from 1.4% in 2025. At the same time, the MPC will need to balance that weaker activity against inflation rising close to 4.0% which we think they will do by keeping rates on hold. That said, if energy prices move even higher, as they did in 2022, then a recession looks likely given the weaker labour market and tighter starting point for monetary and fiscal policy, especially if the MPC has no choice but to hike rates to weigh on second-round effects.

Latest related insights