UK growth: Lack of momentum even before adverse Middle East impact

Rob Morgan, Chief Investment Analyst at Charles Stanley, part of Raymond James Wealth Management 

The UK economy ended last year with a flicker of momentum with growth of 0.2% in November and 0.1% in December 2025. Yet that looks to have been quickly extinguished with today’s weak estimated January GDP reading. The flat figure for the month comes as a particularly bitter disappointment, as the UK now finds itself at the mercy of global energy markets and the potential headwinds of an extended conflict in the Middle East.

The bigger picture is that UK economic output is no larger than it was in June last year, even before the now darkening backdrop. Now, the surge in global oil and gas prices, triggered by the escalating Iran conflict, threatens to reignite inflation, drain household finances, and squeeze company profits.

Rising energy costs act like a tax, particularly in a UK economy so dependent on gas for both electricity and heating. Wholesale prices are effectively set by the marginal unit of power generation, natural gas, meaning any global price spike feeds directly through to bills. With the labour market already softening and households still carrying the scars of past price shocks, a renewed rise in energy costs raises the prospect of weaker consumer spending and tight margins for businesses.

It’s now also looking less likely that lower borrowing costs will ride to the rescue. Until recently, the Bank of England had been primed to continue its interest rate cuts as inflation drifted decisively lower. Yet that glimmer of relief for borrowers has faded as policymakers confront the risk that higher energy prices could embed a new inflationary pulse. For how long the Bank delays easing will hinge on its view of the shock. The MPC may look past a short‑lived spike, but fears of a renewed wage‑price spiral would likely force a more cautious stance.

All eyes are now trained on the Gulf to see how long the disruption lasts. If energy prices retreat quickly, the UK economy could regain some modest momentum. But a prolonged conflict risks pushing the country towards something resembling an energy shock – higher inflation and weaker growth, a toxic mix of ‘stagflation’ that damages both corporate performance and household budgets.

Even before the current crisis the economic projections were shifting downwards for the near term. Back in November 2025, the OBR expected the economy to grow by 1.4% in 2026, up slightly from the previous year’s 1.3%. That forecast has since been revised to 1.1% in the spring statement as a cooling labour market weighed on the outlook. And this downgrade does not account for the potential inflation shock now building. If oil and gas prices remain elevated for an extended period, growth risks falling significantly short of even these low expectations.