Dharshini David: Economy on shaky ground even before Iran war

After a rough few years, we all want to be better off. The government hoped 2026 was the year in which it could raise our growth game. But like many well-intended New Year's resolutions, this one is at risk of being scuppered before spring gets going.

Growth lost momentum in the second half of 2025 as consumers, anxious about tax increases and rising unemployment, held back.

There was hope, spurred on by various indicators, that they'd start 2026 with renewed vigour.

But the official data, while volatile and prone to revision, suggested the economy stalled in January.

It was the likes of eating out, hotel stays and a drop in business for recruitment agencies that held things back.

Even if things picked up in February, we appear to have been on shaky ground even before the attacks in Iran.

And now we face new obstacles. A rise in petrol prices of 6% in less than a fortnight not only hurts pockets but also risks hitting consumer confidence.

The longer and more extensive the military campaign, the greater the damage. Higher energy prices threaten bigger household bills for everything from gas and electricity to food and furniture shipped from overseas.

A resurgence in inflation, even one that is very modest compared to what we saw during the Ukraine war risks hitting spending, growth and pushing up unemployment further - especially so if greater price pressures derail the chances of further interest rate cuts.

The silver lining is that with each energy price shock, we have become less reliant on oil and gas and more efficient in our overall energy use. So we've become less vulnerable to spikes.

But the fallout could still be very damaging. The extent depends on if and how much further energy prices go up.

If this conflict is sustained, economists are muttering about growth being perhaps just half of the 1.1% the Office for Budget Responsibility predicted for this year - or even less.

Those at Oxford Economics suggest that if oil prices were to soar to $140 and remain there for a couple of months, the UK economy would risk shrinking.

The longer the conflict goes on, the greater the concerns, the more the Chancellor, Rachel Reeves, will be under pressure to deliver a support package.

But she'll be wary: we've yet to pay off the higher debt incurred from the emergency help given during Covid and the last energy crisis. And as yet, the overall scale of increases in energy prices are not near crisis levels.

As Reeves has acknowledged, a swift de-escalation of hostilities would be the easiest (and cheapest) solution. Making us feel less nervy about the future would be the fastest way to get us back on track in the short run.