Not before time, Sir Keir Starmer has warned the British people that the longer the Iran war goes on, “the more likely the potential for an impact on our economy, impact into the lives and households of everybody and every business”.
At the moment, he adds, “our job is to get ahead of that, to look around the corner, assess the risk, monitor the risks, and work with others in relation to that”.
So it is, but the prime minister doesn’t need to look around the metaphorical corner when the immediate consequences are staring him in the face. A little over a week after the Israelis and the Americans launched their “epic” attacks, the world price of gas and electricity has shot up, and with them fuel bills. The cost of petrol at the pumps in the UK is already rising.
Stock markets continue to slide, reducing the value of savings and pension pots. The yield demanded by investors to lend to the UK government is up once again, especially near-term rates – signalling worries about short-term inflation and glum prospects for the public finances.
The recent warm optimism radiating from Andrew Bailey, the governor of the Bank of England, about interest rates steadily falling through the year has been supplanted by market expectations of rates actually increasing. That is now seen as more likely than not.
Banks and building societies are already repricing mortgage deals upwards – not good for property values and the “feel-good factor”.
US president Donald Trump says the surge in the price of oil is a “very small price to pay for safety and peace”. Unfortunately, it is not he who will be footing the bill.
Rachel Reeves’s spring statement last week now not only seems a world away, but largely irrelevant. Rather than the gradually improving outlook portrayed by the chancellor, the UK seems set for another bout of “stagflation” and austerity. Because the oil shock is so sudden and because so many of the West’s supplies emanate from the Gulf states, an increase in costs feeding through to inflation is inevitable.
It is not just fossil fuels that no longer flow through the Strait of Hormuz. Chemicals such as urea for fertiliser and sulphuric acid for copper refining are also stuck.
What’s more, this energy crisis is the first ever to involve every nation in the Middle East region. Its effects are likely to be more long-lasting, more severe and pervasive than any previous shocks since the quadrupling of the oil price in 1973. Everything – from running NHS medical scanners to an Amazon delivery, the price of bread, or a foreign holiday – will be affected.
Recent experience following the Russian invasion of Ukraine highlights just how vulnerable an open economy such as the UK is to such trends – and how prone Britain is to such cost increases to ignite a domestic wage-price spiral. The UK, in short, is not well placed to withstand this latest external shock.
Ms Reeves has already chaired an emergency G7 energy summit, concerned with coordinating monetary and fiscal policy internationally to prevent a likely recession turning into depression.
As in previous critical episodes in recent decades, including the global financial crisis, Covid and Ukraine, international cooperation will be crucial.
In Britain’s case, the additional self-inflicted and continuing effects of Brexit only add to the complications. More broadly, domestic and international policy responses are also now more difficult to achieve. Mr Trump’s “America First” policy and his continuing enthusiasm for tariffs are one insurmountable obstacle to a united front, and every major economy is, in any case, severely constrained from borrowing more money to get through this emergency because of existing high levels of debt and taxation, and the increasingly heavy burden of servicing respective national debts.
By way of example, the cost of the UK’s energy price guarantee at the height of the previous spike in gas and electricity bills between 2022 and 2023 amounted to more than £40bn, not much less than the entire UK defence budget. It is already obvious that Ms Reeves will be hard-pressed to meet her existing fiscal targets, let alone find tens of billions more to subsidise domestic energy bills. Something will have to give.
So, in a sense, now we know what was behind Sir Keir’s initial reluctance to join in Mr Trump’s war in Iran – foresight and instinct, even wisdom. It was not just concerns about international law, the fate of the Iranian people and the lack of a clear plan for the aftermath that motivated the prime minister’s caution. It was that he already implicitly understood what the dire effects on the Western economies of an uncontrollable, open-ended, rapidly spreading conflict would turn out to be.
Whether he has had the nerve to tell President Trump that a prolonged war will tip the world into an economic depression, he should certainly highlight the dangers now, as politely, privately and persuasively as he can.
If he, with leaders of America’s other hard-pressed allies, can convince President Trump that now is the optimal moment for America to “declare victory and move on” and end this disastrous war, then Sir Keir will have helped save the world economy. For that, even his harshest critics will have to give the PM some credit.
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