Morgan Stanley warns high energy prices and rate hikes could cause ‘pronounced UK recession’
Britain’s economy could be dragged into recession by the end of this year by high energy prices and interest rate hikes, economists at Morgan Stanley have warned.
Following this morning’s data showing a slowdown in private sector growth this month and a surge in input costs (see 9.41am), Morgan Stanley economist Bruna Skarica has warned that the energy price shock is likely to prompt the Bank of England to raise interest rates, which would hurt growth.
Skarica points out that oil prices have risen by around 40% since January, with natural gas contracts up by around 80%, prompted the financial markets to predict the BoE will raise rates this year.
Skarica told clients:
Should these financial conditions and commodity prices be sustained in the coming months, we would be calling for a pronounced UK recession at the turn of the year.
Yesterday, before Donald Trump claimed that “very good” talks had taken place with Iran, the markets were predicting UK interest rates would be a whole percentage point higher by December.
Now, though, the money markets are only predicting 66 basis points (0.66 of a percentage point), implying two quarter-point rises are fully priced in.
Key events
Afternoon summary
Time to wrap up…
RSM: decent chance of a UK recession
Thomas Pugh, chief economist at audit, tax and consulting firm RSM UK, has also suggested the UK could drop into recession (usually defined as two quarterly contractions in a row).
He wrote this morning:
“Looking ahead, the inevitable impact of soaring energy prices will be slower growth.
We now expect the economy to stagnate for the rest of this year as higher energy prices and tighter financial conditions cause disposable income to shrink. Admittedly, the household saving rate is high entering the crisis, which would allow households to cushion the blow to disposable incomes by saving less and government support may also reduce the impact on GDP. But the given real household disposable income was already predicted to grow by less than 1% this year, it is inevitable that consumer spending will slow.
Obviously, everything depends on how energy prices move going forward but we now expect growth of around 0.5% this year with a decent chance of a recession.”
Morgan Stanley warns high energy prices and rate hikes could cause ‘pronounced UK recession’
Britain’s economy could be dragged into recession by the end of this year by high energy prices and interest rate hikes, economists at Morgan Stanley have warned.
Following this morning’s data showing a slowdown in private sector growth this month and a surge in input costs (see 9.41am), Morgan Stanley economist Bruna Skarica has warned that the energy price shock is likely to prompt the Bank of England to raise interest rates, which would hurt growth.
Skarica points out that oil prices have risen by around 40% since January, with natural gas contracts up by around 80%, prompted the financial markets to predict the BoE will raise rates this year.
Skarica told clients:
Should these financial conditions and commodity prices be sustained in the coming months, we would be calling for a pronounced UK recession at the turn of the year.
Yesterday, before Donald Trump claimed that “very good” talks had taken place with Iran, the markets were predicting UK interest rates would be a whole percentage point higher by December.
Now, though, the money markets are only predicting 66 basis points (0.66 of a percentage point), implying two quarter-point rises are fully priced in.
Deutsche Bank: ‘petrodollar regime’ could be undermined by Iran war
The Iran war risks undermining the US dollar’s role as the world’s reserve currency, Deutsche Bank strategists have suggested.
Deutsche Bank’s Mallika Sachdeva and George Saravelos argue the foundations of the “petrodollar regime” – under which global oil sales are priced in US dollars (USD) – will be tested by the Middle East conflict.
New research from Sachdeva shows there could be “significant downstream effects” to the dollar’s use in global trade and savings, and the dollar’s role as the world’s reserve currency, he argues – after all, a world that is more self-sufficient in defence and energy could also be a world that holds fewer reserves in dollars….
Sachdeva and Saravelos explain:
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The world saves in dollars in large part because it pays in dollars. The dollar’s dominance in cross-border trade is arguably built on the petrodollar: globally traded oil is priced and invoiced in USD. This arrangement can be traced to a deal struck in 1974 where Saudi Arabia agreed to price oil in USD and invest surpluses in USD assets, in exchange for US security guarantees. Because oil is a core input to global manufacturing and transport, there is a natural incentive for global value chains to dollarize, and global surpluses to accumulate in USD.
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The foundations of the petrodollar regime have been under pressure even before this conflict. Most Middle East oil is now sold to Asia not the US; sanctioned oil from Russia and Iran has already been trading off dollar rails; Saudi Arabia has been localizing defence, and experimenting with forms of non-dollar payment infrastructure such as Project mBridge.
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The current conflict may expose further fault lines, by challenging the US security umbrella for Gulf infrastructure and the maritime security for global trade in oil. Damage to Gulf economies could encourage an unwind in their foreign asset savings. In this context, reports that the passage for ships through the strait of Hormuz may be granted in exchange for oil payments in yuan should be closely followed. The conflict could be remembered as a key catalyst for erosion in petrodollar dominance, and the beginnings of the petroyuan.
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A bigger risk could come if the world begins to move away from globally traded oil and gas itself, to more resilient sources of energy including domestically available fuels, renewable energy, and nuclear power. The energy choices of the Global South, Europe and North Asia will be key to track. A move away from oil could be as powerful as the pressure to price it in other currencies.
Interest in EVs surges
Alex Daniel
Interest in electric cars has surged since the Iran war sent the price of petrol and diesel spiralling higher, according to listings site Autotrader.
The company said inquiries about new electric vehicles had jumped 28% since fighting began at the end of February, with searches for used EVs up 15% over the same period.
Ian Plummer, Autotrader’s chief customer officer, said the conflict had “clearly moved fuel costs to the front of buyers’ minds,” even though pump prices remain below their 2022 peak.
“This isn’t just about price, it’s about confidence,” he said, adding:
“When people feel that traditional fuel is vulnerable to global events, the appeal of electric becomes far stronger so the conflict is acting as a significant catalyst for EV interest across the UK market.”
Used EVs now account for nearly 20% of all of Autotrader’s enquiries for cars under five years old, the highest share the platform has ever recorded.
“That said, previous peaks in interest like in 2022 haven’t led to sustained increases in electric purchases,” Plummer cautioned, “so there is still work to do to ensure consumers are confident that electric cars can fit their lifestyles.”
Ares becomes latest private credit player to limit withdrawals
Jitters about the private credit market are rising, as more firms in the sector curb withdrawals from some of their funds.
Ares, an alternative asset manager, has limited redemptions at its $10.7bn private credit fund, Ares Strategic Income Fund, at 5% after clients sought to redeem 11.6%.
According to Ares, investors asked to withdraw more than $1.2bn from the fund in the last quarter, but it limited withdrawals to $524.5m. It plans to allow 43% of the requested redemptions, so each requesting shareholder receives a portion of their request.
Shares in Ares are down 1.5% in morning trading in New York.
The move comes shortly after a similar move from Apollo Global Management.
Apollo said last night it would curbing redemptions from one of its largest non-traded private credit funds after clients sought to redeem 11.2% – more than double the fund’s 5% quarterly cap (which it is sticking to).
These redemption requests are a sign that risks in the Private Credit market may be growing, as the Iran crisis pushes up financing costs and creates worries about the global economy.
Goldman Sachs, though, argue that private credit is unlikely to generate large growth spillovers on its own.
In a new research note, they say:
Our analysis suggests that private credit stress is unlikely to generate large macroeconomic spillovers on its own. And while lending by private credit firms will likely tighten in coming months, bank lending to businesses has accelerated recently, corporate sector balance sheets are healthy, and increased AI-related investment demand will likely be a tailwind to credit growth.
UK petrol and diesel prices keep rising
UK diesel prices have climbed by 22% since the Iran war started, new data show.
According to RAC Fuel Watch, the price of a litre of diesel has risen by 2.7p today to 173.83 a litre. That’s 31.5p more than on 28 February, the first day of the conflict.
Petrol prices are up another 1.4p to 148.55 a litre, up 15.7p (or 11.8%) since the war began.
RAC head of policy Simon Williams warns that prices are likely to keep rising in coming days:
“Diesel looks likely to break the 180p-a-litre mark in the next week or so, and if it goes on to reach 182p the price of a tank for a family car would breach £100. If petrol climbs to 150p, as seems inevitable, it will take the cost of a fill-up to £82.50.”
Such increases would add to the ‘upside risks’ which Huw Pill is concerned about.
Bank of England chief economist warns of ‘upside risks to price stability’ from Iran war
The Bank of England’s chief economist is warning that the upside risks to inflation are mounting as a result of events in the Gulf.
Huw Pill, speaking at a central bank conference in Skopje, North Macedonia, has declared that he “stands ready to act” against inflationary pressures stemming from developments in the Middle East, to deliver price stability over the medium term.
Pill, one of the more hawkish policymakers at the Bank, presents two different interpretations of the risk of the energy crisis causing ‘second round’ effects – higher prices, and wages.
One interpretation is that because the labour market is softer than in 2022, central bankers could take “a more sanguine view” of the risk of inflation persistence today, compared to following the invasion of Ukraine (when inflation soared over 10%).
But, an alternative interpretation places more weight on structural change in price and wage setting as the explanation of greater-than-expected inflation persistence after the 2022 energy shock, Pill adds. That interpretation would imply inflation will again be higher than the Bank’s forecasts predict.
Pill (who voted unanimously with fellow policymakers to leave UK interest rates on hold last week) is weighing up both interpretations.
He argues, though, that “the burden of proof lies on the side of those seeking to deny a role for structural change”.
He tells his audience in Skopje:
The pursuit of a robust monetary policy response inherent in these considerations led me to support the unanimous MPC decision to hold Bank Rate at 3¾% at our meeting last week. That said, I see the upside risks to price stability mounting as a result of events in the Gulf.
As a result, I stand ready to act – if necessary – to contain the lasting components of any new inflationary pressures so as to deliver on the MPC’s price stability mandate over the medium term. The fog of uncertainty in which we always operate cannot be an excuse for inaction. Uncertainty is always present (perhaps especially so of late), but the task of monetary policy makers is to provide clarity on their pursuit of the price stability objective in that uncertain world.
Wall Street drops at the open
Stocks have opened lower on Wall Street, as yesterday’s relief rally rather peters out.
The Dow Jones industrial average has dropped by 329 points, or 0.7%, to 45,879 points.
The broader S&P 500 index is down 0.4%.
Stocks had rallied yesterday after Donald Trump claimed that the US and Iran had held productive talks – which Tehran has denied.
European markets now in the red
European stock markets have now moved lower, as investors await the open of Wall Street in a few minutes time.
With anxiety over the Middle East conflict still high, shares are lower in London, Paris and Frankfurt.
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UK’s FTSE 100: down 0.35%
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Germany’s DAX: down 1.25%
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France’s CAC 40: down 0.7%
Markets remain “sceptical and headline driven”, according to Fawad Razaqzada, market analyst at Forex.com, who explains:
Markets remain firmly at the mercy of geopolitical headlines, and Trump’s constant social posts delivering mixed messages.
The US dollar, stock indices, gold and crude oil are all continuing to swing on every update tied to the Middle East conflict. Traders are hanging on any signals around whether ceasefire talks are even remotely on the table. Until there’s something concrete, it’s hard to see risk appetite improving in any meaningful way.
UK nuclear power plant to face extra scrutiny over safety standards
Jillian Ambrose
A 42-year-old nuclear power plant in Hartlepool will face extra scrutiny from the industry’s regulator after it failed to meet a safety improvement plan.
The Office for Nuclear Regulation (ONR) said the site had been placed into the “significantly-enhanced regulatory attention” category which will mean extra site visits and inspections to ensure it is meeting safety standards.
The ONR said the EDF-owned plant remained safe to continue to operate, but the decision to increase scrutiny was taken after visits “identified areas where safety improvements are required”.
A spokesperson for EDF declined to comment on the specific incidents which have prompted the nuclear regulator to tighten its oversight of the facility, which has generated electricity since August 1983.
The ONR said its concerns relate to “conventional health and safety, the number of site incidents and in the delivery of agreed performance improvements”.
Dan Hasted, an ONR director, said:
“EDF is committed to delivering a range of improvements at Hartlepool, and we are overseeing this.”
The regulator agreed an improvement plan with EDF last year but the ONR is understood to want a more focused attention on the site’s efforts to improve its safety performance.
An EDF spokesperson said:
“What this change means is that the regulator will visit the site more regularly and carry out additional inspections. We are committed to working with the regulator to ensure it is content that improvements required are being implemented.”
“Hartlepool power station has been a vital part of the Teesside community for more than 40 years and it is important to note the ONR has been clear that the site continues to be safe to operate.”
Details of the increased scrutiny emerged as it was reported that EDF will face an EU investigation into a state aid package for building six nuclear power plants.
The European Commission – the EU competition enforcer – is expected to open an investigation next month over concerns the support will reinforce the state-owned French utility’s market dominance, according to the Reuters news agency.
The scheme, worth tens of billions of euros, is central to France’s plan to renew its ageing nuclear fleet, and would add about 10 gigawatts of capacity, with the first reactor due to be commissioned in 2038. A lengthy EU investigation would risk delaying that timeline.
Back in parliament, Rachel Reeves has told MPs that contingency planning was under way for energy bill support “for those who need it most”, and warned that the economic challenges from the Iran war may be “significant”.
No details about what support might be delivered, but the chancellor did criticise the price cap implemented in 2022 for cutting bills for everyone, including the wealthiest.
Reeves also told MPs she will hold meetings with supermarkets and banks to discuss how they can support their customers, and was giving the Competition and Markets Authority new powers to deal with price gouging.
Politics Live has more details:
Precious metal prices are dropping, as the US dollar strengthens.
Spot gold is down 0.8% at $4,371 an ounce, on track for its lowest close since the start of the year.
Platinum is down over 3% at $1,389 an ounce.
Reeves giving economic update on Middle East
Over in parliament, chancellor Rachel Reeves is starting to give an economic update on the crisis in the Middle East.
She’s expected to outline what the government is doing, and may do in future, in response to the soaring global energy prices caused by the Iran war.
Reeves starts by paying tribute to the armed forces, before telling MPs that the price of oil and gas have remained high since she last addressed the House of Commons. She also cites the Bank of England’s forecast, last week, that inflation could rise to 3.5% later this year.
Our Politics Live blog has all the details:
The markets are dubious about Donald Trump’s latest “TACO helping”, reports Chris Beauchamp, chief analyst at IG Group.
After a morning of modest rises on many European stock markets (but losses in Germany), Beauchamp says:
“Donald Trump has managed to swerve disaster multiple times during his presidential terms, but investors aren’t sure he can get away with it this time.
The 5-day pause seems designed purely to allow new US forces to arrive in theatre, and reports of an attack on gas infrastructure in Iran overnight remind us that the war is still going. Hormuz is still closed of course, piling on more pressure both on the US president and the global economy. And there is no guarantee that any talks will lead to progress. For the moment it looks like most are just standing aside to see what happens, or doesn’t happen, next.”
This morning’s UK PMI report is an early sign of the economic damage the Iran war is causing, says Matt Swannell, chief economic advisor to the EY ITEM Club:
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The conflict in the Middle East will weigh on the UK’s growth outlook, with March’s flash Purchasing Managers’ Index (PMI) already showing the first signs of the impact on business sentiment. Squeezed real incomes, supply side disruption and tighter financial conditions will all prove headwinds to growth over the coming year.
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Businesses are already reporting a sharp rise in input prices, justifying the Monetary Policy Committee’s (MPC) shift to a ‘wait and see’ approach to setting interest rates at its March meeting. With disruption expected to be prolonged, a sustained hold in Bank Rate appears likely.
UK retail sales tumble in March by most since Covid lockdown in 2020
Another blow! British retail sales have tumbled this month by the most since April 2020, when the economy was locked down in the Covid-19 pandemic.
The CBI’s latest ‘distributive trades’ survey has found that retail sales volumes dropped at a rapid pace in the year to March, the fastest rate in almost six years.
The survey found that 66% of retailers surveyed reported a fall in sales volumes this month, with just 13% reporting a rise, showing the biggest drop in sales volumes since April 2020.
Sales are expected to decline at a broadly similar pace next month, according to the poll which was conducted between 25 February and 13 March.
Retail sales volumes dropped at a rapid pace in the year to March, marking the quickest decline in nearly six years, according to the latest CBI Distributive Trades Survey. The decline is set to continue at a similarly sharp rate next month. pic.twitter.com/VrCuv62Rxp
— CBI Economics (@CBI_Economics) March 24, 2026
Retailers judged March’s sales to be “poor” for the time of year, to a greater extent than last month. April’s sales are set to fall short of seasonal norms, though to a slightly lesser degree. pic.twitter.com/4OD8Dilk2K
— CBI Economics (@CBI_Economics) March 24, 2026
The CBI also found:
Martin Sartorius, lead economist at the CBI, says:
“Momentum in the retail sector remained poor in March, with annual sales volumes falling sharply and no signs of an imminent recovery. Retailers report that weak economic conditions continue to weigh on household spending, with subdued activity also evident across the broader distribution sector.
“Steps taken by the government last week to address youth unemployment challenges – including launching foundation apprenticeships in hospitality and retail – are welcome moves to mitigate rising employment costs. However, more must be done to lower the cost of doing business, including securing workable outcomes on the Employment Rights Act and delivering a simpler, more competitive tax system. The conflict in the Middle East – which risks fuelling price pressures and squeezing household budgets – underscores the need for the government to take further action to lower the cost of doing business for distribution firms.”
UK sells 10-year gilt with highest yield since 2008
The UK has successfully sold more than £2bn of government bonds this morning, but it paid a high price due to the turmoil from the Iran war.
Britain sold £2.25bn of 10-year government bonds today; the auction saw strong demand, with investors submitting bids for 3.5 times as much debt as was available.
But despite that demand, the debt was sold at an average yield of 4.911%, the highest rate for any 10-year bond since 2008.
That follows the jump in UK bond yields in the markets this month, where 10-year gilt yields hit the highest level since 008 yesterday, as investors buy and sell debt from each other.
