FX.co ★ Oil shock to cripple UK economy

The UK economy risks losing the momentum it had gained in Q2 2026 due to a major energy shock. According to a fresh Deutsche Bank forecast, escalation of the conflict around Iran will sharply cut household incomes and provoke an operational crisis across the corporate sector. Deutsche Bank’s chief UK economist Sanjay Raja noted that after a vigorous upturn in late winter, domestic GDP slipped slightly into negative territory in April, and macroeconomic risks continue to tilt toward deterioration. Analysts expect only modest 1% GDP growth for the full year. GDP in the current quarter is projected at 0.1%, rising to just 0.2% in the second half of the year.

The UK’s key driver — the services sector — contracted by 0.1% month‑on‑month in April. Retail sales of motor fuel plunged 10.2% as pump prices soared, the weakest reading since November 2020. Consumers began to cut back spending, pushing clothing sales down 2.4%. The only local support came from car retail and wholesale, where new registrations jumped 24% year‑on‑year. The hospitality sector fell 0.4%: pub turnover dropped 0.2% while the restaurant sector recorded a marginal 0.1% rise after 2.5% growth in March.

The industrial picture is mixed. Industrial production retained only a minor momentum and rose 0.2%, helped by a 2.5% increase in domestic oil extraction, while manufacturing output declined 0.2%. The deepest slump was in construction, where output fell 0.7% month‑on‑month and was 1.7% below last year’s levels. The construction PMI collapsed from 45.6 to 39.7, one of the worst readings since the pandemic. Experts conclude that with unemployment set to rise to 5.4% by late summer and a fresh wave of inflation, real household incomes are likely to continue shrinking.