Iran Oil Shock Slows GDP Growth & Depresses SMEs

Britain’s small and medium-sized businesses are facing one of the most punishing times since the pandemic, as the Middle East oil boom threatens to push the UK economy to the brink of recession within weeks.

The Item Club, an influential economic forecasting group, now expects the UK to “flirt” with recession during the second and third quarters of the year, with GDP growth falling to 0.7 percent in 2026, down from 1.4 percent last year. Growth in 2027 is penciled in at a “sub-par” 0.9 percent, a sore point for owner-managed businesses already struggling with nervous customers.

The starting point is the closure of the Strait of Hormuz, a chokepoint through which about a fifth of the world’s oil passes. The International Energy Agency described the disruption as the biggest supply shock in the history of the global oil market. Shipping in the crisis came to a halt on Sunday after Tehran reasserted control of the waterway, with Donald Trump and the Iranian regime accusing each other of violating a ceasefire agreement after February’s US-Israeli strikes.

The US president accused Iran of “total violation” after reports of targeted fire at ships near the sea, and repeated his threat to target Iran’s bridges and energy infrastructure unless Tehran accepts Washington’s terms. Brent crude fell nearly 9 percent to below $90 a barrel on Friday after Iran signaled it would reopen the waterway, effectively closed since the February 28 attack.

For British SMEs, many of which still bear the scars of the post-Ukraine energy crisis, the consequences are clear. Matt Swannell, chief economic adviser to the Item Club, said: “Consumer spending power will be curtailed, while more expensive financing arrangements and some poor global economic conditions will pour cold water on corporate investment plans.”

The labor market is predicted to deliver a “big jolt” from the pandemic. The Item Club expects unemployment to rise to 5.8 percent by the middle of next year, with another 250,000 people out of a job as firms downsize. Unemployment is not expected to drop to 4.75 percent until 2029. Swannell flagged a “worrying shift” that created unemployment, from new entrants joining the labor market and toward outright layoffs, a trend that often hits the smallest employers.

Inflation, meanwhile, is expected to continue to nearly double the Bank of England’s two percent target by the end of the year. However, the Item Club does not expect a “2022 repeat”. A soft economy and a weakening job market should make it harder for companies to pass on cost increases to customers “violently” as they did in the months following Russia’s full-scale invasion of Ukraine.

That low pass explains why the Bank is less likely to reverse the course of rates. The Monetary Policy Committee is expected to view current borrowing costs as already slowing activity and “inflation-dependent”, Item Club is also doubling down by the middle of next year, welcome news for SMEs weighing refinancing decisions.

Separate analysis from EY underscores how much geopolitics weighs in boardrooms. Of the 55 profit warnings issued by UK listed businesses in the first quarter, 49 per cent cited policy change and uncertainty in the political environment as a key driver, the highest proportion recorded for that reason in more than 25 years of company tracking. The FTSE’s leisure and leisure sector, the bellwether of discretionary spending, has hit its highest number of profit warnings in three-and-a-half years.

Attitudes among consumers are similarly declining. Deloitte’s latest tracker shows overall consumer confidence fell to its lowest level since 2023, falling 3 percent in the first quarter, the sharpest quarterly decline since early 2022. Five out of six confidence measures compiled from Deloitte’s survey of 3,200 UK consumers have fallen, with the biggest drop coming in household income. Discretionary spending has dropped 7 percent in its weakest learning since early 2023.

For British SME owners, the message from the data is clear: the next two parts will examine cash flows, hiring plans and pricing power in ways not seen since the pandemic. Those who move early to secure working capital, renegotiate energy contracts and diversify supply chains away from Gulf-dependent routes are likely to be the ones left standing when growth returns.