WeekWatch

UK growth outlook down as Iran conflict marks one month

With the Iran conflict now entering its fifth week, the ability of the UK economy to withstand a prolonged economic shock is coming into increasing focus.

These fears have been exacerbated by a revised growth forecast from the Organisation for Economic Co-operation and Development (OECD). Last week, the OECD lowered its growth forecast for the UK in 2026 to 0.7%. This compared to a forecast of 1.3% in December. It was the OECD’s most severe downgrade among the 
G7 major economies.

Meanwhile, a recent survey by the British Retail Consortium found that consumer sentiment has plummeted since the start of the conflict in Iran.

With so much macro noise, markets barely registered when the Office for National Statistics revealed that UK inflation (measured in CPI) was flat in February. As the data only covered up to 28 February, it didn’t include any of the effects of the Iran conflict. 

The issues facing the UK are well known. For some time, UK annual GDP growth has been hovering around or just above 1%. While inflation has been on a gradual downward trend, it remains above the 2% target. If higher energy costs push up inflation and hamper GDP growth, the prospect of ‘stagflation’ could become a reality.

Stagflation

Stagflation occurs when an economy experiences slow growth, high unemployment and high inflation simultaneously. The UK is not alone in facing this economic prospect as the Iran war drags on. Much of Europe finds itself in a similar situation. Even the US, which has a faster growing economy and is more insulated from the fuel price increases, could potentially face a stagnation shock.

This leaves central banks in a difficult position. With inflation pressures resurfacing, largely driven by higher energy prices, there is a lower probability of central bank cutting interest rates. Tighter policy risks weakening economic growth, creating a stagflationary dilemma.

Even so, the longer the conflict persists, the more markets are likely to price in further tightening. In the UK, markets currently expect the BoE's policy rate to rise to around 4.25% by the end of the year, a 1% increase compared to pre-conflict expectations. 

If developed market economies were to drift into stagflation, Carlota Lopez, Equity Strategist at SJP, believes US equities could be more exposed than the UK, largely because of higher starting valuations. She says: “In a stagflationary environment, it becomes much harder to justify the elevated multiples we currently see across US equities. That suggests valuations are more likely to come under pressure. By contrast, valuations in the UK and Europe are less stretched. While the inflation impact could be higher in UK and Europe because of their higher energy dependence, and these markets could still be affected, on a relative basis US equities may face greater downside risk, which supports our current positioning across portfolios.”

Stagflation remains just one concern. Higher inflation will put pressure on corporate margins and weaken demand everywhere. Thanks to its energy self-sufficiency, the US is more insulated than Europe. Higher energy costs in the latter will impact the bottom line and could hurt returns.

Even with this advantage, US stocks performed similarly to other global peers in March. The FTSE 100 ended last week down 8.7%  since the end of February, while the S&P 500 was down 7.4%.

Dollar

Another advantage US equities have had over other markets is the resurgent dollar. Before the conflict, the dollar had been on a downward trend. President Trump’s unpredictable nature, a changing international environment and investors looking to reduce exposure to the US encouraged a softening for the dollar.

However, in the flight to safety since the start of the Iran war, investors have shown there is still demand for the dollar. While the price of gold has fallen from over $5,000 per ounce since the start of the conflict to under $4,500, the dollar has moved in the opposite direction. 

A stronger dollar makes imports slightly cheaper, which may help the US with some of the inflationary pressures it is feeling. However , it also makes US made products comparatively more expensive to export, potentially undermining certain types of US businesses. 

Investors urged to use valuable allowances before tax year end

Investors are being encouraged to make full use of their annual allowances before the end of this week, which marks the close of the 2025/26 tax year.

Claire Trott, head of advice at St. James's Place, says: “Now is the time to consider if you have used all your allowances for this tax year, especially the ‘use it or lose it’ ones.”

Key allowances for the 2025/26 tax year that will lapse if unused by 6 April include individual savings accounts (ISAs) limits, the capital gains tax annual exemption and some gifting allowances.

Individuals can save or invest up to £20,000 in an ISA in the 2025/26 tax year. Any interest, income and growth within ISAs are tax free, making these an important financial planning tool. 

“The ISA is clearly a no-brainer, but other allowances need greater consideration. Time is short, but it has not run out yet,” Claire adds.

The same deadline applies to the £500 dividend allowance, as well as the £3,000 capital gains tax allowance (or £1,500 for assets held in most trusts).

Do not overlook gifting allowances. They can help reduce the size of an estate for inheritance tax (IHT) purposes. The £3,000 annual exemption can be carried forward for one year, meaning any unused allowance for the 2024/25 tax year will expire after this week.

Individuals can also carry forward unused pension annual allowances from the previous three tax years. This means any unused allowance from 2022/23 must be used before the end of this week.

NS&I ordered to pay compensation to bereaved families over payment delays

National Savings and Investments (NS&I) will pay compensation and return savings to thousands of bereaved families after the government admitted to 
significant administrative errors at the bank.

The state-backed financial services provider experienced widespread problems with systems and payments  between 2008 and 2025. These caused incorrect payments to be made, as well as long delays, in particular with deceased customers’ accounts.

NS&I will pay £500 million to around 37,500 customers who have been affected by the issues. 

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief is dependent on individual circumstances.