This post was originally published on our Substack. 

The war in Iran and its impact on global energy markets have sent shockwaves through the UK economy. Consumer confidence is down, as fuel prices and interest rates rise. And, while most households’ energy costs are shielded by the Ofgem price cap for now, April is a key month for businesses renewing their energy contracts.

Given all that, you might expect to see signs of a slowing economy. But that wasn’t the message coming from today’s closely-watched Purchasing Managers’ Index (PMI). Its somewhat sunny outlook came as a surprise, not just to me, but markets too. For those of you who don’t have this monthly data release marked in your calendars (I can’t relate) the PMI is worth watching because it’s one of the better leading indicators of GDP growth. This morning’s data saw a rise in the headline index to 52.0 (values above 50 indicate growth) suggested the economy’s pre-war momentum continued into April.1

Pre-emptive buying could square the circle

This is…puzzling. Especially because businesses are reporting being hit. In the April PMI survey, S&P reported that input-cost inflation was at its highest rate since November 2022. The disruption goes beyond price pressures: recent data from the ONS’s Business Insights and Conditions Survey (BICs) showed nearly one-in-ten businesses (9.3 per cent) experienced supply chain disruption – the highest share since 2022.

This data provides a tentative explanation for what’s going on. Goods producers in the April PMI survey reported a boost from clients bringing forward orders ahead of further price pressures and supply disruption. The BICS backs this up, with a near-doubling in the share of manufacturing firms stockpiling between early March and April.

Of course, this is only one month of often volatile data, but it tracks with the theory that apparent economic strength in April might prove to be a last hurrah rather than evidence of surprising resilience.

This might be pain delayed, not pain avoided

A single month of strong activity data shouldn’t distract us from the broader economic picture: the future of trade through the Persian Gulf remains uncertain, and oil and gas prices remain well above their pre-war levels. Yesterday, we published new research considering the effects that a shock this size is likely to have on the UK – how exposed is the UK? And what should policy makers do in response?

Here’s what we found.

This latest shock is not yet as severe as the one that Britain faced after Russia’s full-scale invasion of Ukraine in 2022. While oil-price moves have been comparable to – and in some markets bigger than – four years ago, the gas price shock has been much smaller. In 2022, prices rose by 300 pence per therm, versus 78 pence per therm in 2026. Gas matters disproportionately for the UK, accounting for almost two-thirds (62 per cent) of households’ energy consumption.

Nonetheless, this shock still has the potential to hit the economy hard. We estimate that if prices returned to their recent peaks, households would need to spend £11 billion extra on energy and fuel in 2026, compared to a world where prices stayed at their early-2026 levels.

Here, Britain is more exposed than our peers: household energy bills are closely linked to wholesale gas prices (a double whammy of gas being a big share of energy consumption and also setting electricity prices a lot of the time) and our interest rates continue to be extra sensitive to global economic news.2 Both the IMF and OECD cut their UK growth forecasts by 0.5 percentage points in 2026 – the biggest markdowns in the G7.

How should policy makers navigate this gloomy and uncertain outlook? The Bank of England has an unenviable task: it must balance a robust response to persistent inflationary pressures against tightening too much, crushing growth and destroying jobs in the process. But it is the Government that has the power to support families and businesses, especially if we head into the winter with high energy prices.

As we have previously argued, any government support should be time-limited and targeted at those who need it most – namely families on lower incomes and with high energy needs. Our latest analysis shows why that matters. A plausible downside scenario of reduced growth, lower equity prices and higher interest rates would wipe out more than two-thirds of the Chancellor’s current headroom buffer. It would leave her £8 billion spare: not nothing, but not a lot. On top of existing concerns about the UK’s public finances, this would not be the time for a re-run of the poorly targeted Energy Price Guarantee.

If the second half of this decade is anything like the first, it won’t be long until Britain faces another economic shock. When it comes, we need the Government to be able to help to those who need it. Keeping support targeted in hard times and focusing on rebuilding fiscal space when things improve are essential in an increasingly volatile world.