Market News

The UK is heading for a recession if the energy price shock continues, according to a Wall Street bank.

Morgan Stanley said the Bank of England could raise interest rates if energy prices fail to come down, which would be likely to cause an economic downturn by the end of 2026.

Bruna Skarica, chief UK economist at Morgan Stanley, said Britain would face “a pronounced UK recession at the turn of the year” if energy prices stay at recent highs in the coming months and borrowing costs rise.

The war in Iran has caused oil and gas prices to soar in recent weeks, sparking fears over inflationary pressures and the impact on the UK economy.

Huw Pill, the chief economist at the Bank of England, warned on Tuesday that “there are limits to what the MPC [Monetary Policy Committee] can do” to protect households from the energy price shock.

However, he stressed that Threadneedle Street “stands ready” to raise interest rates if the conflict in the Middle East drags on.

“The fog of uncertainty in which we always operate ​cannot be an excuse for inaction,” he said in a speech on Tuesday.

Mr Pill’s intervention comes as a growing number of economists warn that the energy crisis threatens to push the UK into a downturn.

Simon French, the chief economist at City stockbroker Panmure Liberum, said a recession in the final six months of the year was now “a real possibility”.

He added: “Events in the Middle East can, of course, reverse, but the UK economy’s soft underbelly has been revealed. It cannot be unseen.”

Thomas Pugh, the chief economist at RSM UK, a tax and consulting firm, said: “Everything depends on how energy prices move going forward, but we now expect growth of around 0.5pc this year with a decent chance of a recession.”

The war in Iran triggered the sharpest rise in factory costs since Black Wednesday in 1992, when Britain withdrew the pound from the European Exchange Rate Mechanism, triggering a huge sell-off of sterling that led to soaring interest rates.

The jump in factory input prices recorded by S&P Global in March underlines the effect of the Middle East conflict on manufacturers, which are heavily reliant on fuel and energy-intensive materials.

Both oil and gas prices have surged since the war broke out late last month, as the closure of the Strait of Hormuz has strangled fuel supplies.

Echoes of Black Wednesday

Chris Williamson, of S&P Global, said: “Inflationary pressures have surged higher on the back of rising energy prices and fractured supply chains.

“The acceleration in cost growth in the manufacturing sector was especially severe, being the sharpest since the depreciation of sterling following Black Wednesday.”