The UK economy has officially contracted. GDP fell by 0.6% in the last quarter. The flash estimate from the ONS landed this morning like a thud in the Treasury. Whitehall sources tell me the mood is grim. One senior official described it as a 'perfect storm'. The Iran conflict is the catalyst. Disrupted supply chains. Soaring energy prices. Consumer confidence evaporating. The Bank of England is now expected to hold rates, or even cut them. But inflation is still sticky. A stagflation nightmare.
The Treasury is already modelling a technical recession. Two consecutive quarters of negative growth. That would be the first since the Covid crash. Briefings suggest the Chancellor is preparing an emergency fiscal event. A mini-Budget. But remember what happened last time. The room for manoeuvre is tiny. Public borrowing is already high. Bond yields are twitchy. The pound took a hit this morning. Down two cents against the dollar.
The political fallout is immediate. Tory backbenchers are circling. They smell blood. The Prime Minister's position looks increasingly fragile. A senior MP told me the 1922 Committee is receiving letters. No confidence letters. 'It's a matter of when, not if,' he said. The Labour opposition is sharpening its attack. Starmer will blame 'Tory chaos' and 'global instability'. He's right on the latter. But voters tend to punish incumbents during recessions. The polls are already disastrous for the government. A double-digit lead for Labour.
Defence spending is also under strain. The commitment to 2.5% of GDP now looks unaffordable. Backbenchers are demanding tax cuts to stimulate growth. But the Chancellor is resisting. He insists on fiscal discipline. Sources say he is 'haunted' by the Truss episode. The internal battle lines are drawn. The Treasury versus the Tory right. The PM is caught in the middle.
The business lobby is screaming. The CBI warned of a 'lost decade' if the government doesn't act. But what can they do? A fuel duty cut? Already done. More handouts? The markets would punish. The situation is dire. The Iran crisis shows no sign of easing. Oil prices have spiked again. $120 a barrel. It feels like 2008 all over again. Or worse.
The Treasury is now gaming out scenarios. The worst case: a full-blown depression. The best case: a shallow recession. But no one in Whitehall is optimistic. The word 'crunch' is being used. A crunch moment for the economy. A crunch for the government. I'm hearing whispers of a cabinet revolt. The Defence Secretary is furious about spending cuts. He might resign. That would be a mortal blow.
I will update this as the story develops. But for now, buckle up. This is going to be a long winter.
