Transcription
The UK economy has just been given a short-term warning that could have significant implications over the next few weeks. Speaking on LBC, former IMF deputy director Muhammad El-Erian has said that the outlook has changed quickly due to recent global disruptions, particularly around energy supply and trade routes. What makes this notable is the time frame, a 4 to 8 week window that could determine whether the UK and global economy remain stable or move closer to recession.
This comes at a time when the UK had been showing signs of improvement. GDP growth had picked up with output rising 0.5% in February, well above expectations. Government borrowing had fallen by nearly £20 billion over the past year, reaching its lowest level since 2022 to 2023. At the same time, the unemployment rate had dropped from 5.2% to 4.9% and inflation had been on track to fall back towards the Bank of England's 2% target rate. On paper, the direction was more positive than earlier in the year.
However, that progress is now under pressure. Rising fuel costs and disruption to global shipping, particularly through the Straits of Hormuz, are feeding into higher transport and import costs. For an economy like the UK, which relies heavily on imported energy and goods, these changes tend to pass relatively quickly to businesses and households. Economists are now warning that if these conditions persist, the impact will likely be lower growth combined with higher inflation. A much more difficult environment for both policymakers and consumers.
The key issue now is timing. If supply conditions improve soon, the slowdown may be contained. If not, the risks increase. So before we break this down further, take a look at this clip where former IMF deputy director Muhammad El-Erian joined Sheila Fogerty predicting that there's a global recession on the horizon unless the Strait of Hormuz reopens and normal economic business resumes.
>> But how likely is a is a global recession a UK recession?
>> Um, so the IMF now has revised the UK growth rate to 0.7% from 1.2%. Um, there's a notion in economics called stall speed. Think of a plane. A plane has to maintain a certain amount of forward movement, otherwise it can't maintain altitude. 0.7% makes you more vulnerable to a recession. Right now, I would say it is likely that the UK and the globe will avoid a recession, provided, and here's the important thing, provided the straits are reopened in the next 4 to 8 weeks.
>> If they're not reopened in the next 4 to 8 weeks, it will look very different. Unfortunately.
>> That would take us into global recession in your view?
>> Yes, it would.
What he's describing with that 4 to 8 week window is not a sudden collapse. It's something more technical, but just as important: how much room the economy has to absorb a shock. He uses the idea of stall speed. Think of it like a plane. As long as it's moving forwards at a certain speed, it can stay stable. But if that speed drops too low, it can't maintain altitude. It doesn't crash instantly, but it becomes unstable very quickly. That's where the UK is right now.
Growth predictions by the IMF have already been revised down to 0.7%, which is low. It means the economy is still moving forwards, but only just. There isn't much momentum behind it. So when something unexpected happens, like a disruption to energy supply or global trade, there simply isn't much buffer to absorb it. And that's the key point. If conditions stabilize quickly, the economy can keep moving forwards, even if it's slow. But if the disruption continues, that small amount of growth can easily slip into contraction. Not because of one single event, not because the system doesn't have enough strength to carry the pressure. So this isn't about the economy suddenly collapsing. It's about the margin for error disappearing. A few weeks ago, there was more flexibility. Now, there isn't much. And that's why timing matters so much. The longer the disruption lasts, the more likely it is to feed through into prices, business activity, and overall growth.
And in that same interview, Muhammad El-Erian points to what's already happening in parts of Asia because Asia relies heavily on energy and trade routes going through the Strait of Hormuz. The disruption is hitting them first, not just through higher prices, but through concerns about actual supply. Take a look at the clip.
>> If the war goes on, we will become, and Europe will become, as vulnerable as Asia is right now. If you go to Asia right now, they're not just worried about the price of fertilizers, the price of energy. They're worried about physical availability. They're worried about running out.
In parts of Asia, the impact is already more severe. Many economies there rely heavily on energy shipments passing through the Strait of Hormuz. So disruptions are felt quickly. Take a look at what's happening in Asia.
And let's bring in Kepler lead oil analyst Matt Smith for more. Matt, thanks for coming on with us. How are these ship seizures affecting oil prices and the overall market?
>> Well, Andrew, the oil prices are moving higher here, sort of gradually, but by no means as much as they probably should be. Uh, there seems to be a certain element of complacency because the real, the real problems have not hit yet. And by that, what I mean is that we've had the strait closed for basically 55 days now. That's when the conflict began. And what this means is we're not getting the crude and the products coming out of there and not going to Asia. Now, what we're getting is essentially a domino effect where in Asia, they're not able to produce the jet, the diesel, the gasoline that they need. And so we're starting to hear about fuel shortages there. And that's only going to be ramping up in the days and weeks ahead here. And this is not just in Asia. There's going to be those dominoes continuing. So, they will be hitting Europe, potentially the US, Latin America, everywhere in the world here in the coming weeks and months.
Pushing through to the bowser, motorists in Sri Lanka left waiting hours to fill up. In Thailand, there are growing concerns after some petrol stations ran out of fuel.
>> Right now, I'm worried there might not be fuel available. Many stations seem to be running out. Diesel is the main concern, though other fuels are still available.
It's feared the fuel crisis could push up the price of some groceries by as much as 20%. Tonight, farmers are saying major change could happen around Anzac Day, and if the crisis isn't resolved, the quantity and quality of food will be affected.
In parts of Asia, the impact is already more severe. Muhammad El-Erian expands on what's happening there. Take a look at this clip.
>> Just a word on what you said about Asia there. What set of circumstances takes the UK to where Asia is at the moment in terms of food supply, availability of things?
>> So, the UK, Asia relies overwhelmingly on energy coming through the Strait of Hormuz, which, as you know, they're virtually closed right now. So their supply chain is really problematic. Here in the UK, we have a much more diversified supply chain. So we don't get hit as early as Asia does. But if the situation continues, we will get hit at some point. It will go Asia first, parts of Europe second, UK third. And the irony in all this, Sheila, is the US that started the war [snorts] does, does better in, in relative terms than anybody else.
What that clip makes clear is that this doesn't hit every region at the same time. It tends to move in stages. Right now, parts of Asia are feeling that pressure first because they rely more heavily on energy flows through the Strait of Hormuz. When that route is disrupted, the impact shows up quickly. Not just in higher prices, but in concerns around whether supply can be maintained at all. That's a different level of risk. It's no longer about things becoming more expensive. It's about whether they're available in the first place.
The UK is not in that position yet. It has more diversified supply chains, which means the effects take longer to feed through, but that doesn't mean it avoids them. It just means there's a delay. The pressure builds elsewhere first, then moves across into Europe and eventually into the UK. And that's the important part because what starts as a supply issue in one region doesn't stay contained. It feeds into global pricing, global shipping, and global availability. By the time it reaches the UK, it's already been amplified.
We're already starting to see signs of strain in Europe. Last week, Fatih Birol said Europe has only 6 weeks of jet fuel left before shortages will hit because of the Iran war. And this week, the German company that owns Lufthansa Airlines and other European carriers said Tuesday that it would cut 20,000 short-haul flights through October as the Iran war drives up oil prices and deepens worries that some countries may run low on jet fuel. The Lufthansa Group said the cancellation of less profitable routes, focused largely on its hub airports in the German cities of Frankfurt and Munich, would save the equivalent of approximately 40,000 metric tons of jet fuel.
What makes this situation more serious is the combination of two things that don't usually happen together. In a typical downturn, when the economy slows, demand falls, and that tends to bring prices down. Businesses cut prices to attract customers. Energy demand drops and inflation eases naturally as activity weakens. But that's not what we're seeing here. Instead, prices are being pushed up from the supply side, particularly through energy and transport.
When fuel costs rise due to disruptions around key routes like the Strait of Hormuz, it increases the cost of moving goods, producing food, and running businesses. That pressure feeds through the system regardless of whether demand is strong or weak. So even as growth slows, prices can continue rising. This creates a much more difficult environment because households are dealing with higher costs at the same time as economic conditions weaken. It reduces real income, it limits spending power, and increases financial strain. All while the broader economy loses momentum.
That's why this situation is more complex than a standard slowdown. It's not just about growth falling. It's about growth falling while inflation remains elevated. And that's a more difficult situation because the usual tools don't work as well. The challenge becomes even clearer when you look at how policymakers respond.
Under normal circumstances, if the economy is slowing, central banks can lower interest rates to support growth. Cheaper borrowing encourages spending, helps businesses invest, and eases pressure on households, particularly those with mortgages or loans. But when inflation's still high, that option becomes limited. The Bank of England has a primary goal of keeping inflation under control. And if prices are being pushed up by energy costs and supply disruptions, it may be forced to keep interest rates higher for longer, or even raise them further.
That creates a difficult trade-off. Higher rates help to contain inflation, but they also slow the economy by reducing borrowing and spending. Mortgage payments rise, consumer credit becomes more expensive, and businesses face higher financing costs, investment decisions get delayed, hiring slows, and overall activity weakens further. So instead of offsetting the downturn, policy can end up reinforcing it.
This is where recession risk starts to build more quickly. Because the economy is already operating with limited momentum, as seen in the lower growth projections, it doesn't take a large additional shock to push it into contraction. If inflation remains elevated due to ongoing supply issues and interest rates stay high as a result, the combined effect is a sustained squeeze on both households and businesses. Consumers cut back on discretionary spending, focusing only on essentials. Businesses respond by reducing costs, which can include slowing recruitment or scaling back operations. Over time, that behavior feeds into weaker economic output.
And importantly, this process doesn't happen all at once. It builds gradually, often before the official data confirms that a recession has begun. That's why economists pay close attention to these conditions, not just the headline numbers, but the underlying pressures that drive them.
The current situation also highlights how dependent the outlook is on external factors. If energy markets stabilize and supply routes return to normal, some of this inflationary pressure could ease, giving central banks more flexibility to support growth. But if disruptions continue, particularly in key global trade routes, the pressure remains. In that case, the economy is left balancing slower growth against persistent inflation with limited policy options to address both at the same time. And that's ultimately why the warning around the next 4 to 8 weeks is being taken seriously. It's not just about whether growth slows. It's about whether these combined pressures persist long enough to turn a slowdown into a broader contraction.
The current situation also highlights how dependent the outlook is on external factors. If energy markets stabilize and supply routes return to normal, some of this inflationary pressure could ease, giving central banks more flexibility to support growth. But if disruptions continue, particularly in key global trade routes, the pressure remains. And in that case, the economy is left balancing slower growth against persistent inflation with limited policy options to address both at the same time. And that's ultimately why the warning around the next 4 to 8 weeks is being taken seriously. It's not just about whether growth slows. It's about whether these combined pressures persist long enough to turn a slowdown into a broader contraction.