The UK economy is expected to have contracted for a second consecutive month in May as the ongoing Iran war continues to suppress output across key sectors.
Gross domestic product is forecast to have slipped by 0.1 per cent in May, according to some economists, extending a troubling run of weak performance.
The Office for National Statistics is due to publish its latest growth update on Thursday, which is expected to confirm the continuing drag from global turbulence caused by the US and Israel’s war with Iran.
April already saw GDP dip by 0.1 per cent, a sharp reversal from growth of 0.3 per cent in March and 0.4 per cent in February, marking the first contraction since August last year.
That April decline was driven by a fall in output from the services industry, the most dominant sector in the UK economy, which offset growth in both construction and manufacturing.
Surging fuel and energy costs were squeezing businesses and households throughout April and remained elevated into May, though wholesale prices have eased somewhat in more recent weeks.
Chancellor Rachel Reeves acknowledged the pressure, stating it was “not a war we wanted or joined, but one that will have an impact at home.”
Ministers have warned that the economic impact of the Iran war could persist for as long as eight months after the conflict eventually comes to an end.
Food industry leaders have cautioned that the war’s effect on supermarket inflation has yet to fully materialise, but could drive prices up by as much as 10 per cent later this year.
A recent flare-up in tensions between the US and Iran has pushed oil prices back up and extinguished hopes of a near-term resolution to the conflict.
Pantheon Macroeconomics is forecasting another weak performance from the services industry in May, though it expects a more mixed picture across the wider economy, with subsectors like energy supply benefiting from elevated oil prices.
Its analysts are expecting GDP to have shown no growth in May, pointing to a broadly flat but fragile economic picture for the month.
Deutsche Bank struck a more downbeat tone, forecasting a GDP decline of 0.1 per cent in May, reflecting continued softness across multiple parts of the economy.
Sanjay Raja, the bank’s chief UK economist, said services activity remained “sluggish” in May, including information, professional and financial services, and real estate.
Raja noted it was not “all bad news,” adding: “Anecdotally, retailers pointed to a combination of promotions and warmer weather boosting demand for items such as outdoor furniture and fans.”
He also suggested that some sectors could receive a lift this month from England’s progress in the World Cup, with pubs and bars benefiting from busier trading conditions.