Deutsche Bank warned that Britain’s economic outperformance at the end of the first quarter of 2026 is likely to fade as an energy-related shock tied to the Iran conflict squeezes household spending power and increases costs for businesses.
The bank's Chief UK Economist, Sanjay Raja, said gross domestic product probably edged into negative territory in April, following two months of robust activity that closed out the first quarter. Deutsche Bank now expects UK GDP to expand 1% over the full year, projecting growth of just 0.1% quarter-on-quarter in the second quarter and 0.2% across the second half.
Raja summarized the mechanism behind the downgrade: "With the energy shock from the Iran conflict in full swing, household incomes will likely be squeezed. The cost of living and the cost of doing business will have likely increased, weighing on activity and investment." Those pressures, the bank says, have already begun to show through in a range of monthly indicators for April.
Sector-by-sector readings for April
Services - the largest component of the UK economy - probably contracted 0.1% month-on-month in April, according to Deutsche Bank's assessment. Within retail, core sales volumes fell 0.4%, while automotive fuel sales plunged 10.2% month-on-month, the sharpest single-month drop since November 2020, a sign motorists delayed refuelling as pump prices rose. Clothing stores saw a 2.4% decline, with retailers attributing weaker sales to variable weather and greater consumer price sensitivity.
Counterbalancing some of those retail losses, new car registrations jumped 24% year-on-year, which helped push overall retail and wholesale output up 0.3% month-on-month.
Hospitality also showed strain. The RSM-CGA Hospitality Tracker recorded a 0.4% year-on-year fall, while restaurant sales expanded only 0.1% compared with April 2025 - a marked slowdown from 2.5% growth in March - and pub sales fell 0.2%. Deutsche Bank translated these figures into a 0.8% month-on-month contraction for the hospitality sub-sector.
Information and communications services, which grew 1.6% across the whole of the first quarter, are forecast to decline 0.6% month-on-month in April.
Industrial output offered some resilience. Overall industrial production is forecast to have risen 0.2% month-on-month, supported by a 2.5% monthly increase in crude output. Manufacturing, however, is estimated to have dipped 0.2% after a 1.2% rise in March, with notable falls in paper, wood, chemicals and clothing.
Construction is projected to suffer the sharpest decline among sectors, with Deutsche Bank forecasting a 0.7% month-on-month fall that would leave construction activity down 1.7% year-on-year. Sentiment data support that view: the construction PMI fell to 39.7 from 45.6 in the previous month, marking its second-lowest reading since the COVID-19 pandemic.
Labour market and inflation outlook
Deutsche Bank expects unemployment to rise as the economy cools, forecasting a jobless rate of 5.4% by late summer. The bank also anticipates rising inflation in the second half of 2026 that is likely to erode disposable incomes. Combined with what it describes as a lack of domestic political stability, these factors are expected to weigh on overall activity.
Taken together, the bank's analysis points to a slowing UK economy in the near term as energy-driven cost pressures feed through to households and firms, tempering spending and investment.