Britain's Economy Shrank 0.1% In April As The Iran War Hit Home

Higher prices usually come with a growing economy. Britain just got the opposite.

The economy shrank 0.1% in April, even as fuel costs kept climbing. That mix is the early shape of stagflation. Economists really don't like it.

Why The Economy Shrank

GDP is the value of all a country makes. Britain's GDP rose 0.4% in February and 0.3% in March, then slipped in April. The drop was no shock, as economists had pencilled in a 0.1% dip.

Services led the fall. That is the biggest part of the economy, and it fell 0.2% on the month.

The worst-hit piece was a surprise. Sports and recreation fell 9.1%. Why? The Iran war canceled events in the Middle East, and UK firms were tied to them.

Factories, shops, and travel agents all said the same thing. The war pushed fuel costs up, which ate into their April sales.

The war is not new. It just crossed its 100th day. And the longer it runs, the more it shows up in the data.

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The Word Economists Fear: Stagflation

Stagflation is easy to feel and hard to fix. Prices keep rising while growth stalls. The usual cure for one half hurts the other half. Most of the time, growth and prices move together. Right now they are pulling apart.

Suren Thiru is an economist at a UK accounting body. He called the drop a "damaging descent into stagflation." Drivers had rushed to buy fuel in March, which lifted growth. By April, with pump prices high, they cut back. The tailwind became a headwind.

This also boxes in the Bank of England. A rate cut next week now looks unlikely. Cutting rates while prices climb can add fuel to inflation, which just means the pace of rising prices.

A Bigger Hit Than Anywhere Else

Back in April, the IMF gave a warning. The UK could take the biggest growth hit from the war of any major economy. The IMF is the global body that tracks economies.

Why the UK? It buys most of its energy from abroad, so when oil and gas spike, it feels it fast. The IMF now sees UK growth of just 0.8% this year, down from the 1.3% it expected in January.

Prices did cool a bit, with inflation easing to 2.8% in April. But that was mostly a cap on energy bills, and that cap jumps 13% in July.

What To Watch

The July cap hike is the next number to watch. It could push bills and prices up all over again. The Bank meets next week, and markets will hang on every word.

For now, Britain is paying more and making less. That is the exact mix central banks dread.

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