UK set to shed 163,000 jobs amid Iran war fallout
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The economic challenges resulting from the Iran war are projected to cost the British economy jobs this year.
With no resolution in sight for the conflict, the latest regional forecast from the Item Club indicates the UK economy is expected to lose 163,000 jobs in 2024.
The report highlights that lower income regions such as South Wales and the Humber will be most severely affected by the economic shock stemming from the Middle East.
Both regions depend heavily on manufacturing and construction sectors, which are currently impacted by rising energy costs and supply chain disruptions.
The Item Club, an economic forecasting group, estimates 5,700 job losses in South Wales and 2,800 in the Humber over the year.
However, the economic impact of the energy shock will extend further, as households nationwide reduce discretionary spending amid soaring living costs.
This will adversely affect retail and hospitality sectors, with the Item Club forecasting employment declines of 25,000 in London, 12,500 in Birmingham, 9,800 in Leeds, and 6,200 in Glasgow.
Tim Lyne, economic adviser to the Item Club, says:
“Some of the lowest income regions will feel the biggest effects of the manufacturing and construction sectors reducing headcount in the face of rising energy prices and supply chain disruption.
While consumers in these areas typically have less rainy-day savings, which will reduce spending in the retail and hospitality sectors.”
This forecast of rising unemployment presents a challenge for the government, as Keir Starmer faces intensified political pressure following last week’s local election results.
The agenda
- 1pm BST: UK Finance hosts ‘Growth Delivery Summit’
- 3pm BST: US existing home sales report for April
There has been limited reaction in bond markets to Starmer’s speech, in which he vowed to resist leadership challenges and promised a new approach to Europe.
The yield on 30-year UK bonds increased by approximately 6.7 basis points, rising from 5.6bps at the start of the speech.
Yields on 10-year bonds rose by 5bps, up from 4.3% prior to Starmer’s address.
These movements indicate a slight decline in bond prices during the speech, with borrowing costs remaining elevated for the day.
E.ON acquires British energy supplier OVO
In the energy sector, Germany’s E.ON has agreed to acquire rival Ovo, forming one of the UK’s largest energy suppliers.
The merger combines two significant UK energy providers. E.ON currently serves nearly one in seven UK households and businesses, while Ovo has four million residential energy customers.
E.ON has assured that existing tariffs will be maintained and service will continue without changes.
Chris Norbury, CEO of E.ON UK, says:
“The deal will create a retailer with the capability, the technology and the customer base to make new energy work for everyone.
For decades the UK energy system focused too much on those upstream. Now is our opportunity to change that. Solar, batteries, EVs and a retailer built to orchestrate. That is what this deal is about: customers in control and new energy that works for everyone.”
Chris Houghton, CEO of OVO, says:
“The energy market has fundamentally changed in recent years. OVO was founded to challenge the status quo, and we’ve built a strong retail business focused on delivering for customers and supporting the transition to cleaner energy.
As the market has evolved, scale and access to significant long-term capital for the energy transition have become non-negotiable. Following a thorough review, we believe this decision gives the business the strongest footing for the future.”
GMB union welcomes British Steel nationalisation
The GMB union has expressed support for Keir Starmer’s decision to nationalise British Steel from its Chinese owners, Jingye.
Charlotte Brumpton-Childs, GMB National Secretary, said:
“Unions have long known Jingye will not negotiate in good faith.
This legislation will cover the whole steel industry - it isn’t specifically for British Steel but it is what will protect it from foreign owners.
British Steel is a nationally strategic asset, it is right the Government does everything in its power to secure its long term future.
GMB welcomes this decisive and timely intervention by the Government which will protect one of the UK’s most important industries.”
Starmer confirms nationalisation of British Steel
In his leadership reset speech, Keir Starmer confirmed that the government will nationalise British Steel.
The Prime Minister described steel as “the ultimate sovereign capability,” arguing that strong nations today need to produce steel.
“I can announce that legislation will be brought forward this week to give the government powers [subject to a public interest test], to take full national ownership of British Steel.”
This legislation is expected to be part of the new legislative programme announced in the King’s Speech on Wednesday.
British Steel employs 3,500 people at its Scunthorpe plant and has faced concerns over potential closure by its owner Jingye.
Bank of England policymaker urges caution on rate hikes
Bank of England policymaker Megan Greene advised waiting to assess the Iran war’s progression before deciding on interest rate increases.
Greene, considered one of the more hawkish members of the Bank’s monetary policy committee, noted that the UK faces upward risks to inflation.
“It’s worth waiting for a little while to see what happens with the progression of this war and therefore see what we can infer about how it will propagate through the economy before we make a move.”
“We’ve now had a negative supply shock, an energy shock, and that stands to push inflation up and growth down, which is a terrible situation for a central banker to be in.”
Keir Starmer is scheduled to deliver a key speech amid rising pressure on his leadership, with live coverage provided by Andrew Sparrow.
European stock markets fall amid Middle East concerns
European stock markets opened broadly lower as investors remain concerned about the stalemate in the Middle East conflict.
France’s CAC 40 index fell 0.75%, Germany’s DAX declined 0.2%, while London’s FTSE 100 rose 29 points (0.3%), buoyed by gains in banking and oil sectors.
Government bond yields increased across the board, with UK debt experiencing the largest losses.
Borrowing costs in the US and eurozone also rose amid fears that the ongoing Iran war will drive higher oil prices, inflation, and interest rates.
German 10-year bund yields rose 2 basis points, UK 10-year gilt yields increased by 5bps, and US 10-year Treasury yields climbed 2bps.
Victrex shares fall after profit warning
Shares of British high-performance polymer manufacturer Victrex dropped nearly 7% following a profit warning linked to rising energy and raw material costs due to the Middle East conflict.
The company also announced plans to reduce its workforce by approximately 10%.
Victoria Scholar, head of investment at Interactive Investor, said:
“Inflationary headwinds as a consequence of the conflict in the Middle East are weighing on a number of UK businesses. We have already heard from companies like Next, Asos, Sainsbury’s and WH Smith which have warned of higher costs. Now shares in Victrex have shed almost 6% today on the back of a profit warning. It anticipates weaker annual profit before tax of between £42m and £44m for fiscal 2026, falling short of estimates for £46.6m. First half underlying pre-tax also profit dropped by 18% to £19m.”
Victrex stated that the Iran war will increase energy and raw material inflation, prompting the company to reduce headcount by 10% to manage costs.
Shares have declined 12% year-to-date and nearly 40% over the past year. Analysts hold a mixed view with a consensus hold recommendation, according to Refinitiv.
Rising UK borrowing costs linked to political and geopolitical risks
Investor strategist Neil Wilson of Saxo UK attributes the rise in UK borrowing costs to concerns over a potential leadership change and the Iran war’s impact on oil prices.
“After sliding for much of the latter part of last week gilt yields have jumped this morning on the political risk premia associated with a potential defenestration of Starmer and Reeves, but also due to the situation with Iran and oil price spike.
Fiscal loosening is not what the market wants to see at a time of existing pressures on finances, a fragile fiscal position, and higher borrowing costs due to the war. No fireworks yet but we could see some outsize moves should a leadership contest be triggered. Bond vigilantes are watching, waiting.”
UK government borrowing costs rise as pressure builds on Starmer
UK government borrowing costs increased at the start of trading, driven by inflation concerns and uncertainty surrounding Keir Starmer’s leadership.
The yield on 30-year UK bonds rose approximately six basis points to 5.63%, while the 10-year benchmark yield increased by 5bps to 4.96%.
These yield rises reverse earlier declines following Starmer’s pledge to remain prime minister despite poor local election results.
Starmer is set to deliver a speech promising to address major challenges, though his position is precarious after 40 Labour MPs called for him to set a resignation date, and backbencher Catherine West threatened a leadership challenge if he does not.
Investors may anticipate that a leadership change could lead to increased government spending and borrowing.
Michael Brown, senior research strategist at Pepperstone, said:
“The triggering of a leadership election, and a subsequent change in Prime Minister, leaves the GBP [the pound] and Gilts [UK government bonds] not only grappling with a ratcheting up of political uncertainty, but also being forced to face up to a likely more left-wing successor to Starmer.
Such an outcome would, in all likelihood, lead to a substantial loosening of the ‘fiscal rules’, along with considerably higher government spending, and even higher taxes, possibly even including a manifesto breach in raising NI, VAT, or income tax.
But… the jump in the oil price is also a factor pushing up government bond yields, as it threatens to create higher inflation, making it harder for central banks to cut interest rates.”
China's factory inflation hits 45-month high
The Iran oil shock has driven China’s factory inflation to its highest level in nearly four years.
Producer price inflation in China rose to 2.8% year-on-year in April, up from 0.5% in March, according to National Bureau of Statistics (NBS) data.
The NBS attributed the increase to rising prices in sectors including non-ferrous metals, oil and gas, and technology equipment.
Consumer price inflation also increased to 1.2% in April from 1% in March.
Lynn Song, economist at ING, explained:
“The impact of higher energy prices stemming from the Iran war was clear in the [consumer inflation] data. We saw a 17.4% YoY surge in energy for the transportation subcategory, which rose 11.5% month-on-month after a 10% spike in last month’s data.
China’s gasoline prices have risen by less than crude oil prices since the start of the Iran War, suggesting that there’s still likely upside ahead for this subcategory if oil prices stay elevated.”
Pound slips against rising dollar
Sterling started the week lower, falling by half a cent against the US dollar.
The pound declined to $1.358, erasing most of Friday’s gains. Market participants are monitoring political tensions in Westminster, as uncertainty over Starmer’s future may reduce demand for UK assets.
Dollar strength also contributed to sterling’s weakness.
Tony Sycamore, analyst at IG, said:
“Some of that [the pound’s weakness] is to do with the US dollar catching a bid on the reopen this morning on risk aversion flows after the Iranian response to the US peace plan.”
Heathrow's April passenger numbers fall amid Middle East conflict
The Iran war has affected passenger numbers at Heathrow, the UK’s largest airport.
Heathrow reported a 5% decline in April passenger numbers to 6.7 million, citing “the ongoing impact of the Middle East conflict on some markets and short-term adjustments to travel plans.”
The airport plans to review its 2026 passenger forecast and provide an update in June.
Heathrow CEO Thomas Woldbye said:
“We know passengers want certainty when planning their hard-earned summer holidays, so we are supporting Government and airlines as they work through their plans to get passengers on their journeys.
While we have seen some short‑term disruption linked to the Middle East conflict, demand for travel remains strong with current fuel supplies stable. April was still our busiest month so far this year, underlining the strength of a global hub airport that can adapt quickly in times of uncertainty.”
Responding to the Item Club’s employment forecast, a UK government spokesman said:
“Recent figures show that there was an improvement in the labour market at the beginning of the year with unemployment falling below 5%, and 332,000 more people in work than a year ago.
But we cannot escape the effects of the war in the Middle East which are likely to feed through to prices and employment in the coming months.
We will do everything we can to support the country through this period, including by slashing energy bills by up to 25% for 10,000 manufacturers.
Our mission for clean power by 2030 will get us off the rollercoaster of fossil fuel prices, to cut bills for businesses and households for good.”
Oil jumps 4% as Trump brands Iran’s response ‘totally unacceptable’
Oil prices surged 4% amid fading hopes for a breakthrough in US-Iran peace negotiations.
Brent crude futures rose $4, or 3.95%, to $105.30 per barrel after former President Donald Trump described Iran’s response to a US proposal as “unacceptable.”
The ongoing deadlock is intensifying supply concerns as the Strait of Hormuz remains largely closed.
Mohit Kumar, economist at Jefferies, commented:
“Both Trump and Iran rejected each other’s proposals to end the war. Iran refused to dismantle its nuclear program, which has been the key demand from Trump. The Strait of Hormuz remains practically closed. Trump does want a deal, but he needs to show to his supporters that US managed to secure a deal on nuclear, which was the whole point of going into the war.”
