Britain’s small and medium-sized businesses are bracing for one of the worst times since the pandemic as the fallout from the Middle East oil shock threatens to push the British economy to the brink of a technical recession within weeks.
The Item Club, the influential economic forecasting group, now expects Britain to “flirt” with recession in the second and third quarters of the year, with GDP growth halving to just 0.7 percent in 2026, down from 1.4 percent last year. Growth of a “still below average” 0.9 percent is forecast for 2027, a bleak environment for owner-managed businesses already struggling with lower margins and nervous customers.
The trigger is the closure of the Strait of Hormuz, the bottleneck through which around a fifth of the world’s oil flows. The International Energy Agency called the disruption the largest supply shock in the history of the global oil market. Shipping through the strait remained silent on Sunday after Tehran regained control of the waterway. Donald Trump and the Iranian regime accused each other of violating the ceasefire reached after the US-Israeli attacks in February.
The American president accused Iran of a “total violation” after reports of firing on ships near the strait and repeated his threat to attack Iranian bridges and energy infrastructure unless Tehran accepts Washington’s terms. Brent crude fell around 9 percent to below $90 a barrel on Friday after Iran signaled it would reopen the waterway, which has been effectively closed since the Feb. 28 attacks.
For UK SMEs, many of which still bear the scars of the post-Ukraine energy crisis, the impact is severe. Matt Swannell, chief economic adviser at Item Club, said: “Consumer purchasing power will come under pressure, while more expensive financing arrangements and a more uncertain global economic environment will throw companies’ investment plans into disarray.”
The labor market is predicted to suffer the “biggest shock” since the pandemic. The Item Club expects unemployment to rise to 5.8 percent by the middle of next year and another 250,000 people will become unemployed as companies reduce their workforce. The unemployment rate is not expected to fall back to 4.75 percent before 2029. Swannell pointed to a “worrying shift” in the makeup of unemployment, moving away from new entrants into the labor market and toward outright layoffs, a trend that tends to hit smaller employers hardest.
Meanwhile, inflation is forecast to reach almost double the Bank of England’s 2 percent target by the end of the year. Nevertheless, the Item Club does not expect a “repeat of 2022”. A weaker economy and labor market are likely to make it harder for companies to pass on cost increases to customers “as aggressively” as they managed to do in the months following Russia’s all-out invasion of Ukraine.
This muted pass-through explains why the bank is unlikely to change course on interest rates. The Monetary Policy Committee believes current borrowing costs are already slowing activity and “counteracting inflation”, with the Item Club foreseeing two further cuts by the middle of next year – welcome news for SMEs weighing up their refinancing decisions.
A separate analysis from EY highlights how heavily geopolitics weighs on boardrooms. Of the 55 profit warnings issued by UK-listed companies in the first quarter, 49 percent cited political changes and geopolitical uncertainty as key drivers, the highest proportion recorded for this reason in more than 25 years of company tracking. The FTSE travel and leisure sector, an indicator of discretionary spending, recorded its highest number of profit warnings in three and a half years.
The mood among consumers is similarly gloomy. The latest Deloitte tracker shows that overall consumer confidence fell to its lowest level since 2023, falling 3 percentage points in the first quarter, the biggest quarterly decline since the start of 2022. Five of the six confidence metrics compiled from Deloitte’s survey of 3,200 UK consumers fell, with the biggest drop seen in sentiment around disposable household income. Discretionary spending fell 7 percentage points to its weakest level since the start of 2023.
For UK SME owners, the message from the data is clear: the next two quarters will test cash flow, hiring plans and pricing power in ways not seen since the pandemic. Those who act early to shore up working capital, renegotiate energy contracts and diversify supply chains away from Gulf-dependent routes will likely be the ones standing when growth finally returns.
