Signing off...

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Thanks for following our coverage of the latest downturn in the economy, as official figures showed a 0.1pc contraction in UK GDP.

A quick look at the markets shows the FTSE 100 up 1.1pc amid growing hopes that the Bank of England will not raise interest rates as much as previously feared.

The pound is down 0.1pc against the dollar to $1.341 and 10-year UK bond yields remain sharply lower.

Money markets now favour just one increase in interest rates this year after the weakening in the economy. 

Bets have also been fuelled by hopes that the US and Iran can agree a peace deal, with oil prices down to $87, near their lowest level in two months.

Stay up to date with the latest here.

Consumers think inflation will surge to 4pc

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Households fear prices will rise at an even faster pace over the next year as the Iran war hits the economy, the Bank of England said.

Consumers expect inflation to reach 4pc over the year ahead, up from expectations of 3.2pc in February, according to the Bank’s inflation attitudes survey.

Over the longer term, households said inflation would stand at 3.9pc, which is nearly double the Bank’s 2pc target. It is the highest reading since the survey began in 2009.

Higher inflation expectations are a problem for the Bank’s Monetary Policy Committee (MPC), which sets interest rates. Such beliefs can become a self-fulfilling prophecy, fuelling further price rises.

Rob Wood, chief UK economist at Pantheon Macroeconomics, said: “Inflation expectations have been running well above pre-Covid levels consistently. 

“The picture, whether we use YouGov’s or the Bank of England’s data, is of households having less faith in the MPC’s ability and/or desire to bring inflation back to target.”

“A durable ceasefire in the Middle East would help the MPC’s dilemma. 

“But the inflation expectations survey suggests that the MPC was far from defeating persistent inflation before the war began, so policy will need to stay somewhat restrictive even without the latest energy price shock.”

Goldman Sachs predicts rates will stay on hold

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Interest rates will remain at 3.75pc this year despite the shock from the Iran war, one of Wall Street’s biggest banks has forecast.

The Bank of England will keep interest rates on hold next week and for the rest of 2026, according to Goldman Sachs.

However, economist James Moberly warned the Monetary Policy Committee (MPC) could be tempted to raise rates if “second round effects,” such as higher wage demands, begin to fuel inflation.

He said: “Looking ahead, we continue to expect the MPC to remain on hold this year given a restrictive policy stance, tighter financial conditions, and a weak cyclical backdrop that should limit the extent of second-round effects. 

“That said, hikes remain quite possible if energy prices surprise to the upside or signs of significant second-round effects emerge.”

Growth forecast to slow down in second quarter

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Britain’s growth will slow down sharply in the second quarter of the year, economists have predicted, as the effects of the Iran war seep through.

Morgan Stanley expects growth to slow down to 0.1pc in the second quarter of the year, after Britain’s economy expanded by 0.6pc between January and March.

The National Institute and Economic Research (Niesr) forecast growth of 0.2pc in the second quarter.

Rob Wood at Pantheon Macroeconomics is forecasting growth to slow to 0.2pc in the second quarter and 0.1pc in the third quarter.

But he said: “Look through the noise and GDP seems to have been trending up solidly for over two years and still looks solid. There is little sign of a large hit from the Iran war so far.”

French bank expects two rate rises later this year

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The Bank of England will raise rates twice later this year to combat an inflation shock from the Iran war, a French bank has said.

BNP Paribas forecasts rates will rise from 3.75pc to 4.25pc in the second half of the year as higher energy bills push up inflation expectations among households.

It said the Bank would likely leave borrowing costs unchanged at the meeting next week after official figures showed the UK economy shrank in April.

Europe economist Dani Stoilova said: “Beyond the June meeting, we think hiking remains firmly on the table. 

“We anticipate two rate rises during the second half of the year, on the expectation that recent domestic data weakness proves temporary and energy prices rise further. 

“If the Bank of England plans to hike in July, we expect clearer signposting over coming weeks.”

Bosses warn Iran war impact will ‘deepen and spread’

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Business leaders have said the Middle East conflict is “eroding consumer incomes and spending” after official figures showed the economy shrank in April.

Anna Leach, chief economist at the Institute of Directors, said: “April’s decline in GDP shows impacts from the Middle East spreading across the economy. 

“Manufacturers, wholesalers and those in transport, accommodation and travel are all reporting lower turnover arising from the conflict.  

“Meanwhile the prices of crude oil inputs are up 75pc on the year. These impacts will only deepen and spread as time passes, with higher inflation eroding consumer incomes and spending. 

“For businesses, sharply rising fuel, transport and input costs, slowing decision-making and declining confidence are combining with a turbulent and costly domestic policy environment, creating strong headwinds to growth. 

“As the UK continues to navigate these challenges, the careful management of policy trade-offs matters more now than ever. The removal of barriers to growth, from tax and regulation and the delivery of a predictable policy environment, must remain the focus of government policy action.”

F1 cancellations hit British economy

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Britain’s economy shrank in April as F1 Grand Prix in the Middle East were cancelled due to the Iran war.

The service sector, the dominant part of the UK economy, was hit partly by a 4.3pc drop in arts, entertainment and recreation.

The sports industry suffered a 9.1pc contraction, which analysts put down to a hit to sports advertisers.

Thomas Watts, a portfolio manager at Julius Baer, said: “Today’s data shows a clear sign that the domestic economy is beginning to feel the fallout from the conflict in the Middle East.

“It is interesting to see the kind of impact this is having on the entertainment industry, an often overlooked part of the economy when it comes to fuel price shocks. 

“The cancellation of Formula 1 Grand Prix races in Bahrain and Saudi Arabia, as well as other Gulf sporting events such as football and tennis, does seem to have had an effect on a wide range of British firms focused on advertising, recreation, and entertainment.”

FTSE surges as oil hits two-month low

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The FTSE 100 has surged at its fastest pace in a month after Donald Trump claimed he was close to reaching a deal with Iran.

The UK’s flagship stock index has risen as much as 1.5pc in early trading as the US president’s comments sent the price of oil to a two-month low.

British Airways owner IAG Group was the biggest riser, surging by 6.6pc, while housebuilders also rose sharply.

The US president said on Thursday that he had called off further military strikes against Iran which were scheduled for the evening and claimed the Strait of Hormuz would open as soon as an agreement is signed.

As a result, Brent crude oil has fallen as much as 4.3pc to $86 a barrel, its lowest since mid-April.

The FTSE 100 has also been boosted by weak GDP figures, which have also factored into traders reducing bets on the Bank of England raising interest rates later this year.

The domestically focused FTSE 250 was up as much as 1.8pc.

Borrowing costs fall over hopes for lower interest rates

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There was some good news for the Government from the weakening of the economy – it has led to a sharp drop in the cost of borrowing for the Treasury.

The yield on 10-year gilts, a proxy for what the Treasury pays to borrow money in financial markets, has fallen from 4.91pc to 4.81pc as traders reduced bets on the Bank of England raising interest rates.

Money markets now indicate that policymakers will likely only raise rates once this year, having bet on three hikes earlier in the war.

‘We’re on the verge of a Labour recession’

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The Chancellor has been accused by Telegraph readers of blaming the Iran war rather than her “daft policies” after the economy shrinking in April. 

Here are some of the views from the comments section below and you can join the debate here.

Iran shock ‘slowly but surely catching up with the UK’

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The energy shock from the Iran war is “starting to catch up with households and businesses”, Deutsche Bank said after the contraction in Britain’s economy in April.

Consumer facing services suffered a 0.5pc contraction between March and April, which shows households have started pulling back on spending, according to chief UK economist Sanjay Raja.

He warned that 0.4pc growth in manufacturing was actually a sign that many companies were stockpiling as a result of uncertainty caused by the war.

Mr Raja said: “Looking ahead, we continue to see a little more sluggish activity on the way. 

“While May could bring some temporary reprieve (given the warmer weather), we think that activity will continue to slow as real incomes get squeezed by higher energy prices and higher market rates start to eat further into household budgets. 

“For households and businesses, the cost of living and cost of doing business will only increase from here.”

UK stocks jump as traders reduce bets on rate rises

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The FTSE 100 leapt at the open as the weakening in the economy signalled the Bank of England is less likely to raise interest rates this year.

The UK’s flagship stock index rose by 0.8pc to 10,386.57 while the domestically focused FTSE 250 surged by 1.2pc to 23,240.55.

Economy ‘starting to crack’

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Britain’s economy is “faltering” after its strong start to the year as the Iran war hits household incomes, economists have warned.

The 0.1pc drop in UK GDP was the first drop since last August and puts the economy on track to stagnate in the second quarter of the year, according to Capital Economics.

Deputy chief UK economist Ruth Gregory said: “We would be very surprised if industrial production doesn’t weaken further in May and June as the temporary boost from stockpiling unwinds.

The services sector appears to be bearing the brunt of the Iran war fallout, with services output contracting by 0.2pc month on month and activity falling in eight of the 14 services sub-sectors.” 

She added: “We expect the economy to come to a standstill this quarter and next as the hit to households’ real incomes from higher energy prices intensifies.”

Pound falls as ‘recession risks are elevated’

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The pound fell as traders bet that the Bank of England is less likely to raise interest rates following the contraction in the economy in April.

Sterling declined by 0.2pc against the dollar to $1.34 and was down 0.1pc versus the euro at €1.158 as economists warned that “recession risks are elevated”.

Traders are betting that the Bank of England will raise interest rates in November but now place roughly 50-50 odds on another quarter point increase in December, down from a 86pc probability on Thursday.

Luke Bartholomew, deputy chief economist at Aberdeen, said: “The 0.1pc contraction in April is consistent with other data which suggest the economy slowing sharply going into Q2 and that recession risks are elevated.

“That economic weakness helps explain why the Bank of England is very unlikely to follow the ECB’s decision to hike at its meeting next week, and we expect rates to remain on hold for the rest of the year.”

Fergus Jimenez-England, associate economist at Niesr, said: “We expect the Bank of England to leave interest rates unchanged at next week’s meeting.

“While underlying economic activity has softened, the more salient concern for the Bank will be sticky price inflation coming from elevated inflation expectations and lingering concerns over wage growth.”

Britain starting ‘damaging descent into stagflation’

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Britain’s economy is on track to fall into stagflation, economists have warned, as the Iran war pushes up energy costs.

UK GDP contracted by 0.1pc in April, driven by a 0.2pc fall in services, which was partially offset by a 0.1pc rise in construction and 0.4pc growth in manufacturing.

Suren Thiru, chief economist at ICAEW, said: “Skyrocketing fuel costs have noticeably altered the UK’s growth trajectory having flipped from a tailwind to growth in March to a headwind in April as motorists cut consumption in the face of surging pump prices, after frontloading purchases in March.

“April’s drop likely signals the start of a damaging descent into stagflation with surging energy costs, supply chain disruption and geopolitical instability set to suffocate growth, despite a summer World Cup boost for hospitality and some retailers.

Yael Selfin, chief economist at KPMG UK, added: “April’s data points to renewed fragility in the UK economy, with pressure on both consumers and businesses likely to persist over the coming months.

“The impact of the energy shock is continuing to dampen prospects for a sustained recovery in consumer spending. Households are set to see a significant increase in their energy bills from next month, while energy supplies have not yet normalised, leaving the risk of a further rise in the autumn.

“In response, consumers have signalled their intention to cut back on purchases and increase their savings, which will weigh on economic activity.”

Near-term outlook is ‘more challenging’

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Households faced a “renewed squeeze on real incomes” as the Iran war pushes up oil prices, an economist has warned.

Martin Beck of WPI Strategy said the 0.1pc contraction in the economy in April was “a setback, but not yet evidence that the economy is in serious danger”.

He said: “GDP still grew by 0.7pc in the three months to April and after a decent end to the first quarter, some loss of momentum was always likely given higher energy costs, disrupted supply chains and the uncertainty created by conflict in the Middle East.

“The key question is whether April marks the start of a sustained slowdown or a temporary wobble. For now, the evidence points more to the latter.”

However, he warned that higher shipping costs, disrupted supply chains and higher energy prices are feeding through to businesses.

He said: “Although oil prices have retreated from their highs, they remain above pre-Iran conflict levels, while the cap on household energy bills is on course to rise by around 12pc in July. This points to inflation rising temporarily and a renewed squeeze on real incomes.

“Overall, the fall in April GDP is disappointing, but it does not yet vindicate the more pessimistic forecasts for the UK economy. Growth is likely to slow, but with household savings still providing a cushion and parts of the services economy benefiting from structural tailwinds, concerns about a serious downturn are probably overdone.”

Reeves says war ‘will have an impact at home’

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Rachel Reeves defended her economic plan, which she said had delivered growth before the start of the Iran war.

The Chancellor said: “Before the conflict in the Middle East, growth was higher than expected and inflation was falling. This is not a war we wanted or joined, but one that will have an impact at home.

“Our economic plan is the right one, with both the IMF and OECD upgrading their forecasts for growth recently. 

“The choices I have made as Chancellor mean our economy is in a stronger position to deal with the costs of the war, and we are getting on with the job of building a stronger and more secure economy.” 

April downturn follows strong February and March

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The economy shrank by 0.1pc in April, although the ONS said that in the three months since February, growth had risen to 0.7pc, up from 0.6pc between January and March.

Liz McKeown, director of economic statistics at the ONS, said: “The economy grew in the latest three months as a whole, reflecting strong growth in February and March.

“This was despite April showing a small fall.

“Services were again the driver with a particular strength in computer programming, marketing and wholesale companies across the three months, while construction showed some further signs of recovery after a weak winter.

“This was partly offset by falls in research and development and in sports industries, alongside a notable fall in electricity generation.”

Middle East war ‘hits revenues and drives up costs’

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Britain’s economy shrank for the first time since August last year as bosses blamed the outbreak of the Middle East war for pushing up costs.

The ONS said: “The outbreak of conflict in the Middle East, which started at the end of February, has been cited by various businesses in terms of April 2026 data. 

“Some manufacturing industries, wholesale, warehousing and support activities for transportation, accommodation and travel agencies stated that the conflict in the Middle East had an impact, in terms of reduced turnover in April 2026.

“A common theme of the comments received was the increase in prices because of the Middle East conflict. 

“These comments were mainly for energy and fuel costs, with some suggesting an impact seen in April 2026 and also suggesting an impact for future months.” 

Good morning

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Thanks for joining me. Britain’s economy contracted during April as the Iran war pushed up fuel prices. Here is what you need to know.

5 things to start your day

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What happened overnight

Asian stocks extended a global rally on hopes a Middle East peace deal may finally materialise.

The dollar and ‌bond yields dropped and oil prices hit two-month lows as inflation fears eased.

Donald Trump said on Thursday that a peace deal could be signed as soon as this weekend, hours after threatening more strikes on Iran. He said negotiations with Tehran had advanced to the highest levels of Iran’s leadership and had been approved by a broad coalition ‌of regional powers.

The US president’s ‌remarks follow repeated bouts of optimism ⁠that have failed to yield a deal, keeping markets on edge. In this case too, Iran countered that it had not reached a final decision on an agreement.

Oil prices slumped to two-month lows on expectations of an impending ‌agreement. Brent crude futures dropped 1.8pc at $88.76 per barrel, having fallen nearly 3pc overnight.

MSCI’s broadest index of Asia-Pacific shares outside Japan jumped 3.7pc, led by a 7.8pc surge in South Korea’s Kospi. Japan’s Nikkei rose 3.6pc.

China’s blue-chip CSI300 rose 1.5pc, while Hong Kong’s Hang Seng gained 2pc.

On Thursday, the Dow Jones Industrial Average rose 1.8pc, the S&P 500 increase 1.7pc and the Nasdaq Composite climbed 2.5pc after Donald Trump called off strikes on Iran and suggested a peace deal was imminent.

All eyes will later be on the hotly awaited market debut of Elon Musk’s SpaceX, which has made history with the biggest-ever initial public offering.

The IPO raised a record $75 billion, valuing the rocket and spacecraft manufacturer at $1.77 trillion (£1.3 trillion) and making Musk the world’s first trillionaire.