Britain’s small and medium-sized businesses are bracing for one of the most punishing periods since the pandemic, as the fallout from the Middle East oil shock threatens to push the UK economy to the brink of a technical recession within weeks.
The Item Club, the influential economic forecasting group, now expects the UK to “flirt” with recession through the second and third quarters of the year, with GDP growth halving to just 0.7 per cent in 2026, down from 1.4 per cent last year. Growth in 2027 is pencilled in at a “still-below-par” 0.9 per cent, a grim backdrop for owner-managed businesses already contending with tighter margins and nervous customers.
The trigger is the closure of the Strait of Hormuz, the chokepoint through which roughly a fifth of the world’s oil passes. The International Energy Agency has described the disruption as the largest supply shock in the global oil market’s history. Shipping through the strait remained at a standstill on Sunday after Tehran reasserted control of the waterway, with Donald Trump and the Iranian regime accusing one another of breaching the ceasefire struck in the wake of February’s US-Israeli strikes.
The American president accused Iran of a “total violation” after reports of fire being directed at vessels near the strait, and repeated his threat to target Iranian bridges and power infrastructure unless Tehran accepts Washington’s terms. Brent crude fell roughly 9 per cent to below $90 a barrel on Friday after Iran signalled it would reopen the waterway, which has been effectively closed since the 28 February attacks.
For British SMEs, many of whom still carry the scars of the post-Ukraine energy crisis, the implications are stark. Matt Swannell, chief economic adviser to the Item Club, said: “Consumers’ spending power will be squeezed, while more expensive financing arrangements and a less certain global economic backdrop will pour cold water on companies’ investment plans.”
The labour market is forecast to deliver the “biggest jolt” since the pandemic. The Item Club expects unemployment to climb to 5.8 per cent by the middle of next year, with an additional 250,000 people out of work as firms trim headcount. Joblessness is not expected to drift back down to 4.75 per cent until 2029. Swannell flagged a “worrying switch” in the make-up of unemployment, shifting away from new entrants joining the labour market and towards outright redundancies, a trend that tends to hit smaller employers hardest.
Inflation, meanwhile, is projected to run at close to double the Bank of England’s 2 per cent target by the year-end. Even so, the Item Club does not expect “a repeat of 2022”. A softer economy and weakening jobs market should make it harder for companies to pass cost increases through to customers “as aggressively” as they managed in the months following Russia’s full-scale invasion of Ukraine.
That subdued pass-through explains why the Bank is unlikely to reverse course on rates. The Monetary Policy Committee is judged to view current borrowing costs as already holding back activity and “leaning against inflation”, with the Item Club pencilling in two further cuts by the middle of next year, welcome news for SMEs weighing refinancing decisions.
Separate analysis from EY underlines just how heavily geopolitics is weighing on boardrooms. Of the 55 profit warnings issued by UK-listed businesses in the first quarter, 49 per cent cited policy change and geopolitical uncertainty as a leading driver, the highest proportion recorded for that cause in more than 25 years of the firm’s tracking. The FTSE travel and leisure sector, a bellwether for discretionary spending, notched up its joint-highest number of profit warnings in three and a half years.
The mood among consumers is similarly downbeat. The latest Deloitte tracker shows overall consumer confidence has slumped to its lowest level since 2023, falling 3 percentage points during the first quarter, the sharpest quarterly drop since early 2022. Five of the six confidence measures compiled from Deloitte’s survey of 3,200 UK consumers fell, with the steepest decline coming in sentiment around household disposable income. Discretionary spending tumbled 7 percentage points to its weakest reading since the start of 2023.
For Britain’s SME owners, the message from the data is unambiguous: the next two quarters will test cash flow, hiring plans and pricing power in ways not seen since the pandemic. Those who move early to shore up working capital, renegotiate energy contracts and diversify supply chains away from Gulf-dependent routes are likely to be the ones still standing when growth finally returns.
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Britain to ‘flirt’ with recession as Iran oil shock rattles SMEs