The Treasury is bracing for a political storm. New data out this morning shows the UK economy shrank in the last quarter. 0.2% contraction. The first in over a year. The Iran crisis is the smoking gun. Oil prices spiking. Supply chains snarled. Consumer confidence evaporating. My sources in Number 10 say the mood is grim. They had pinned hopes on a 'spring bounce'. That dream is dead.
The Chancellor is scrambling. Quiet briefings to backbenchers. Promises of a 'fiscal event' to stimulate growth. But the maths is brutal. Higher defence spending. Cost of living still biting. And now this. The war premium on borrowing costs is already squeezing headroom. One senior Tory MP told me: 'The whips are nervous. The 1922 committee is restless.' The talk is of a 'doom loop' reminiscent of 2022. Remember the Truss debacle? The memory haunts the dispatch box.
Labour is circling. Rachel Reeves is calling for an emergency budget. She knows the attack lines. 'Tory incompetence'. 'Britain held hostage by global instability'. But privately, even Labour strategists admit the Iran situation is an act of God. No one could fully predict the Houthi escalation or the Strait of Hormuz closure.
The Bank of England is in a bind. Inflation expectations are starting to drift up as oil prices surge. But they cannot raise rates now. Not with the economy contracting. They are trapped. The Governor's latest comments were carefully vague. Reading between the lines, he expects a recession. Short and shallow. But a recession nonetheless.
The data will dominate PMQs. Expect Starmer to go for the jugular. Sunak's defence will be the global context. But as one Downing Street insider admitted: 'The voter doesn't care about context. They care about their wallet.' The Conservative brand is already toxic on the economy. This contraction deepens the wound.
Let's talk numbers. The OBR will have to revise down its forecasts. The fiscal headroom the Chancellor was banking on has evaporated. That means either tax rises or spending cuts. Neither palatable for a government trailing in the polls by double digits. The backbench chatter is turning to leadership. The 'plotters' are circling again. Not openly. But the knives are being sharpened.
The Iran conflict shows no signs of abating. If anything, it is escalating. The UK's role in the coalition strikes has made us a target. Shipping insurance premiums are through the roof. The cost of goods will rise. The consumer is the canary in the coal mine. They are retrenching. Services PMIs already in contraction territory. Manufacturing is on the ropes.
So what comes next? A mini-budget? Another fiscal firebreak? The Treasury is working on contingency plans. But the options are all bad. Borrow more? The bond markets will punish. Cut spending? The NHS and schools are already creaking. Tax cuts? The deficit is too high. There is no easy way out.
This is a Prime Minister running out of road. His personal ratings are underwater. The economy is his Achilles heel. And now war has made it worse. The fundamental question for Westminster: can he survive the autumn? Or will the Tory civil war erupt again? I am hearing the usual suspects are already making calls. Not for a change at the top. Not yet. But laying the groundwork. 'Just in case'.
Keep an eye on the gilt yields. If they spike, the game changes. The last time they spiked, Truss fell. Sunak may not be as lucky. The history books are writing themselves. And they do not look kind.
