UK: War shock weighs on growth outlook – Nomura

⦿ Executive Snapshot

What: Nomura's analysts predict that the ongoing Iran war will keep UK inflation elevated and negatively impact growth forecasts.
Who: Nomura analysts, UK government, local election participants, and the Labour party.
Why it matters: The persistent inflation and weakened growth outlook could influence monetary policy and economic stability in the UK.

UK inflation is expected to remain above target until mid-2027, primarily due to the Iran war.
UK GDP growth has decelerated to 0.1% quarter-on-quarter in both Q3 and Q4 of 2025.
The growth outlook for 2026 is projected to weaken further beyond the first quarter due to the uncertainties arising from the Iran war.
Early local election results indicate strong support for the Reform party, presenting challenges for the Labour party.
Analysts are considering market sensitivities regarding potential interest rate hikes linked to fluctuating oil prices.

The ongoing conflict in Iran is creating geopolitical tensions that directly affect economic indicators such as inflation and growth rates in the UK.
Historical trends show that external conflicts often correlate with domestic economic challenges, highlighting the vulnerability of the UK economy to international events.

The immediate consequence includes potential adjustments in UK monetary policy to address persistent inflation, impacting borrowing costs and economic activity.
Long-term implications may involve shifts in political dynamics and public sentiment, particularly regarding the Labour party's positioning in future elections.

There is a risk of regulatory or economic roadblocks if inflation remains unmanageable, impacting consumer spending and investment.
Competition from emerging political parties like Reform could disrupt the traditional political landscape and influence policy-making.

Upcoming economic data releases and further local election results will be critical in assessing the trajectory of UK inflation and growth.
Future developments in the Iran conflict will significantly influence oil prices and, consequently, the UK economic outlook and interest rate decisions.