Economic update: How resilient are current supply chains?

The first economic effects of the US/Israeli conflict with Iran are showing in real-time data and in forecasts. However, it remains to be seen whether temporary supply chain disruption will lead to longer-term structural changes such as diversifying supplier bases or rerouting trade flows.

On 28 February 2026, Israel and the US launched strikes against Iran. In response, Iran announced it would close the Strait of Hormuz, a passage for roughly one fifth of global oil and gas trade, and shipping through the Strait has largely ceased. The Strait remains subject to a US naval counter-blockade despite a ceasefire being announced on 8 April 2026.

Inflation increases while growth expectations fall

We noted last month that the rise in energy prices due to the conflict is expected to lead to higher inflation in the UK. Indeed, UK Consumer Prices Index (CPI) inflation rose to 3.3% in March 2026, up from 3.0% in February. According to the Office for National Statistics, the rise in motor fuel prices was the greatest contributor to the March inflation increase. Food price inflation was 3.7% in March, up from 3.3% in February.

Recent UK GDP growth forecasts have been adjusted downwards, reflecting the effects of the Middle East conflict. The Treasury’s April 2026 survey of independent forecasts by major banks, consultancies and researchers showed an average GDP growth forecast of 0.6% for 2026, down from 0.9% in March.

On 14 April, the International Monetary Fund (IMF) reduced the UK’s GDP growth forecast to 0.8% for 2026, down from 1.3% in January. This was the IMF’s sharpest downward revision for any of the G7 economies. In the Chancellor’s words, the IMF assesses that “the UK is more exposed to energy price shocks than [its] counterparts”.

Impacts and risks for consumers

The first economic consequences of the conflict for UK consumers are emerging beyond increased fuel prices at the pump. These include increased expectations of food inflation, higher costs of some medicines, and potential disruption to medical supplies.

Food inflation risks

The Food and Drink Federation (FDF) has revised its UK food inflation forecast to over 9% by the end of 2026, driven largely by energy and supply-chain shocks linked to the conflict. This is up from its previous forecast of 3% in January. The FDF notes that for manufacturers with long-term supply agreements, it can take up to a year for increased costs to fully seep through. It says that less processed products or shorter supply chains tend to experience price increases more quickly.

Ken Murphy, the chief executive of Tesco, said he did not recognise the FDF’s food inflation concerns.

The FDF is calling for urgent government intervention. Among other things, it says that the government should open the new British Industrial Competitiveness Scheme (BICS) to food and drink manufacturers. From 2027, BICS will reduce electricity costs for eligible electricity-intensive manufacturers designated in the UK Government’s Industrial Strategy, but, currently, it is not due to apply to the food and drink sector.

The food industry is also monitoring the expected UK-EU Sanitary and Phytosanitary deal. Food industry figures have said that if the UK aligns its laws with the EU’s laws on agrifood and border controls, it could reduce its food-sourcing options for certain non-EU imports. Various businesses and their representatives are also sceptical about the deal’s capability to lower food prices significantly.

Increasing medicines prices and medical supply chain disruptions

Since February 2026, the prices of certain over-the-counter medicines in pharmacies, such as paracetamol and hay fever medicines, have increased by up to 30%. This is the result of higher manufacturing and transport costs: supplies of petroleum derivatives from the Gulf region that are used to manufacture some medicines have become scarcer, and air freight costs have doubled.

Similarly, there are fears about future shortages of medical supplies and equipment, including personal protective equipment, such as disposable gloves and surgical masks. The NHS is working to mitigate the consequences of potential shortages, but concerns remain.

On 23 April 2026, the Minister for Health Innovation and Safety, Dr Zubir Ahmed, said that the UK’s exposure to the Middle East for medical products is limited. He added that there are “well‑established contingency arrangements to manage medicine and medical device supply disruptions where these occur.”

Business confidence struggling

According to the British Chambers of Commerce (BCC), businesses expect that an escalation of the conflict would most likely affect energy prices and supply chains. The BCC’s Quarterly Economic Survey shows that “the economy appears to be operating below potential, with limited resilience to absorb further shocks”. This can weaken business confidence and delay investment further. The BCC notes that the risks go beyond the Iran conflict. It points to the accumulation of recent shocks, including the covid-19 pandemic in 2020 and the Russian invasion of Ukraine in 2022, and highlights the long-term economic consequences that these have brought.

According to the Confederation of British Industry’s Industrial Trends Survey, in April 2026, more manufacturers thought that output would decrease over the next three months than thought it would increase (a difference of –20%). The S&P Global Flash Purchasing Managers’ Index (PMI) survey was more upbeat, although it did show higher inflation in input costs for firms.

Trade flows: Restructuring rather than retreating

Trade experts are more optimistic about the capacity of the trade flows to withstand the current shock in the long term.

Alan Beattie, the International Economy editor at the Financial Times, has highlighted data that shows trade continuing without major collapse, despite the global geopolitical shocks of increased tariffs and conflict in the Middle East. Beattie says that this is because supply chains are resilient and find new trade routes (for example, by shifting freight from sea to land or from more costly air freight to sea). He argues that, over the longer term, globalisation will help economies to absorb energy shocks with increasing ease (assuming a world war or other dislocation in the international order doesn’t happen in the meantime).

The ability of supply chains to adapt to changing circumstances (PDF) was also highlighted by a trade expert panel at a National Institute of Economic and Social Research (NIESR) seminar in April 2026.

Professor Linda Yueh from Oxford University and the London Business School highlighted that over the course of a decade, businesses have shifted from a “just-in-time” approach to supply chains to a “just-in-case” approach. She said this shift was in response to geopolitical tensions, increased tariffs and increased labour costs in China. She added that the current Middle East conflict was prompting businesses to secure their supplies, specifically, of energy, helium, uranium and fertilisers.

Silvana Tenreyro from the London School of Economics argued that pursuing “simplistic” ‘re-shoring’ or self-sufficiency makes national economies more vulnerable to domestic shocks. Instead, she said that businesses and governments needed to diversify trade partners, focusing on those with low geopolitical risk or aligned values.

Towards energy security?

As noted above, the UK is a net importer of energy and therefore exposed to global supply shocks. However, the Iran conflict has prompted the government to accelerate certain policies to support renewables.

Government measures

The Energy Secretary, Ed Miliband, said the Iran war has “once again shown” that clean power is essential for the UK’s energy security. He announced that under the Future Homes and Buildings Standards (due to come into force in 2028), all new homes in England will have to be fitted with heat pumps and solar panels. He also confirmed that plug-in solar panels will be available to consumers by late 2026.

The government’s energy package of 21 April 2026 aims to reduce the effect of increased gas prices on UK electricity prices. Measures in the package include offering voluntary long-term fixed contracts to certain existing low-carbon generators and increasing the electricity generator levy from 45% to 55% to recoup electricity generators’ excess profits resulting from high gas prices. This is part of a suite of measures intended to support the clean energy rollout and businesses and consumers as energy prices rise.

Consumer demand for renewables

Following the outbreak of the conflict, some energy companies reported increased consumer demand for solar panels and heat pumps.

Commentary

Linda Yueh has argued that policymakers must honestly communicate that mitigating cost‑of‑living pressures arising from trade fragmentation is “hard and expensive” (PDF). She says that governments can choose either to absorb these costs through fiscal policy or allow them to pass through to consumers.