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P.ublished 13th March 2026
business
Stalling UK Economy Vulnerable To Fallout From Conflict In The Middle East
Anna Leach, Chief Economist at the Institute of Directors, said:
“GDP was flat in January, marking a disappointing start to the year. Within services, employment services had a particularly weak month, as a sharp decline in hiring took its toll on the recruitment sector – activity is now down 8% on January 2024. Although consumer services edged up on the month, they were flat on the quarter as confidence to spend remains weak. And while manufacturing continued to recover from the impact of the cyber-attack on JLR last year, auto output is still lower than a year ago, close to 10% down on January 2024. Meanwhile, construction activity remains very weak as regulatory delays and depressed demand continue to drag on housebuilding.
“The outbreak of conflict in the Middle East hits an already troublingly fragile UK economy and sharpens the action needed to lift growth prospects. Energy prices have already risen sharply, and unprecedented damage to supply capacity in the Middle East will have uncertain effects on energy prices longer term. This risks driving up costs for businesses and consumers at a point when inflation was only just heading back to target, and could cause a further slump in confidence and impetus to spend. It is right that the government stands ready to intervene and support the economy once again. But short-term agility must not distract from the UK’s longer term growth needs. From an energy strategy which takes a realistic approach to the transition to net zero, to workers’ rights that avoid overburdening employers, a laser focus on growth is urgently needed.”
Responding to the latest GDP figures, Julian Jessop, Economics Fellow at the Institute of Economic Affairs said:
"The latest GDP data show that the UK economy is being taxed and regulated to a standstill. The “steady as she goes” Spring Statement now looks even more like a missed opportunity to change course.
"The monthly figures are not very robust and are often revised, but the recent trend is worrying. After growth of 0.2% in November, headline GDP increased by just 0.1% in December and then flatlined in January. The three-month on three-month comparison looks better and actually picked up, from 0.1% in December to 0.2% in January. However, this rate of growth is still feeble. Adjusting for increase in the population, quarterly growth in GDP per head probably remained close to zero.
"The weakest sector in the three months to January was construction, where output fell by 2.0%. This is a damning verdict on the government’s flagship pledges in several key areas, notably housebuilding and infrastructure spending.
"What’s more, these figures were recorded before the shock of the Iran war. The weakness of economic activity will at least make it easier for the Bank of England to look past the temporary impact of the jump in energy prices on inflation. But the spectre of “stagflation” has returned and this will dampen confidence further."
'An economy doesn't grow because ministers will it to'
Lord Frost, Director General of the Institute of Economic Affairs, said:
"These figures are the predictable consequence of Government action that has piled costs onto businesses through the National Insurance rise and a raft of new employment regulations, while offering nothing credible in return by way of supply-side reform. Our continued stagnation tells you something important: an economy does not grow because ministers will it to — it grows when businesses have the confidence and capacity to invest. The Chancellor cannot keep blaming global headwinds when the damage is largely self-inflicted. If this Government is serious about growth, it needs to stop treating it as a slogan and start making the policy choices that actually deliver it."
“While the economy managed to eke out modest growth in the three months to January, underlying momentum remained weak. The broader picture is still one of an economy treading water since the middle of last year.
“However, this data is already backward-looking. The near-term outlook is now dominated by heightened uncertainty surrounding conflict in the Middle East. Energy prices have risen sharply and, if sustained, will only intensify the by now familiar mix of high inflation and weak growth.
“Oil and gas price shocks risk placing renewed strain on businesses and households, and government will need to respond with agility to the evolving conflict. With firms already squeezed by high industrial energy costs, this moment reinforces the need to cut the cost of doing business – including finding appropriate landing zones for the Employment Rights Act and simplifying the tax system to support growth.”