UK economy hit hardest by crisis in the Middle East

Emeritus Professor Joe Nellis is economic adviser at MHA, the accountancy and advisory firm.

The OECD’s warning that the UK could be the hardest hit among G20 economies by the Iran conflict underlines how vulnerable the country’s fiscal position remains to global shocks — especially those that drive energy prices higher.
 

Growth down

The immediate risk is to growth. A spike in oil and gas prices would squeeze household incomes and raise costs for businesses. Consumers are likely to cut back, while firms delay or scale down investment, slowing activity across the economy.
 

Inflation up

Higher energy prices will push inflation back up, just as it appeared to be stabilising. This places the Bank of England in a difficult position — support growth and risk fuelling inflation, or keep interest rates higher for longer and deepen the slowdown.
 

Fiscal stability at threat

Slower growth would weigh on tax revenues, while higher inflation would increase government spending through index-linked costs and debt interest payments. With borrowing already elevated and bond yields still close to record highs, the scope for fiscal flexibility becomes increasingly constrained.
 

The Chancellor in a bind

Events in the Middle East have shown the Chancellor’s house to be built on sand. The key question now is how the Government will respond to weaker growth, higher inflation, and volatile financial markets, while protecting the most vulnerable from the most damaging effects of this crisis.