Middle East Conflict Drives Inflation Surge and Hiring Freeze Panic - SMALL FIRMS ON EDGE

Economists everywhere and in every business organisation, have hot towels over their heads as they try to predict the impact war in the Middle East will have on our economy. If you’ve been to a local British Chamber of Commerce (BCC) business breakfast this morning, you’ll probably have heard little else discussed, opined on and predicted about. The researchers at BCC are warning that the UK economy will suffer from sluggish growth this year, and there’s a risk of more tax rises to come.

The BCC does a lot of very useful research amongst its members and uses the data and insights to project ahead, especially through quarterly surveys. It is saying that the services sector is set to keep the UK economy afloat this year, and that there will be contractions in business in construction and manufacturing. The BCC has revised its growth forecast for this year down to one per cent from 1.2 per cent, creeping back up to 1.3 per cent in 2027 and 1.1 per cent in 2028. These figures are much lower than the Office for Budget Responsibility (OBR)’s projections in the Spring Statement of 1.6 per cent for either year. 

Inflation is also a worry for the BCC. It had been hoped that inflation would fall 2.7 per cent by the end of 2026 but the head of research at the BCC says the risks around the war in Iran are “interrupting progress” on inflation. Higher energy prices are likely to keep inflation well about the Bank of England’s 2% target and the Bank is likely to keep interest rates higher for longer than expected. 

The longer the conflict goes on the more the economy will be affected and the harder it will be to reset to ‘normal’. You can’t stop oil production one day and restart it the next and the resulting price increases take longer to go down than they do to go up.  Businesses in all sectors and of all sizes, but particularly the small and micro businesses, without deep pocket and reserves to see them through tough times, are likely to be watching in trepidation to see how their businesses are hit as the war in the Middle East drags on. As households see their bills rise and have less money to spend on anything other than bills, the more the impact spreads.

We’ve seen firms hold back on hiring people while they’ve worked out the impact of rising bills, wages, business rates and national insurance contributions and if unemployment rises again as the BCC predicts that also hits consumers and household spending and raises the possibility of new tax rises and spending cuts.  

Despite the Chancellor’s attempts in her Spring Statement last week to convince us that stability has replaced chaos most small and micro businesses will be feeling anything but stable in the current economic environment.