Julian Harris: Reeves Stands Firm on Energy Support

Hungary’s central bank has cut its 2026 GDP growth forecast to 1.7% from 2.4% due to rising energy prices. The bank highlighted the inflationary pressures caused by higher energy costs and the temporary relief provided by fuel price caps. It emphasized the need to maintain tight monetary conditions to curb inflation expectations.

In the UK, manufacturing growth slowed in March 2026, with the S&P Global UK Manufacturing PMI easing to 51.4 from 51.7 the previous month. This marked the weakest expansion in three months. The war in the Middle East was cited as a factor weighing on global demand and contributing to longer supplier delivery times.

UK manufacturers are experiencing the largest surge in input costs since 1992. The flash March PMI showed a significant rise in energy, freight, and raw material prices. These cost increases are being passed on to consumers, with output prices rising at the fastest pace since April 2025. The manufacturing sector has been operating with thin margins, making it vulnerable to further shocks.

Why Did This Happen?

The war in the Middle East has disrupted global energy markets and supply chains, pushing up costs for UK manufacturers. Energy-intensive industries such as chemicals and metals are particularly affected, as energy costs account for a large portion of their production expenses. Shipping routes through the Gulf and Suez region have also become more expensive and risky, increasing freight and insurance costs.

The UK manufacturing PMI highlights a renewed wave of cost shocks, arriving at a time when firms were beginning to stabilize after earlier disruptions from the Ukraine war and the pandemic. This new shock is compounding the challenges faced by UK industry, with some producers forced to raise prices or cut production.

How Did Markets React?

The UK services sector also showed signs of slowing growth in March, with the services PMI falling to a six-month low of 51.2. Businesses reported a decline in customer demand due to the war, leading to weaker growth expectations. The overall slowdown in both the manufacturing and services sectors is raising concerns about the broader economic outlook.

The services PMI data also showed a faster reduction in export sales and new work from abroad since April 2025. Anecdotal evidence pointed to delayed projects and reduced international travel as contributing factors. These trends are likely to have long-term implications for UK economic activity.

What Are Analysts Watching Next?

Analysts are closely watching how the Bank of England responds to the dual challenges of slowing growth and rising inflation. The March PMI data suggests that the Monetary Policy Committee will need to balance the risks of maintaining higher interest rates to control inflation against the risk of deepening the slowdown in manufacturing and services.

The war-driven energy and logistics shock is expected to persist, with energy prices likely to remain elevated for an extended period. This could force firms to make difficult decisions regarding investment, production, and employment. For the UK economy, the coming months will test its resilience and adaptability in the face of geopolitical uncertainty.

Manufacturers and policymakers are now focused on mitigating the long-term damage to the UK’s industrial base. Strategies such as energy efficiency improvements, supply chain diversification, and investment in productivity could help firms navigate the ongoing cost pressures. For investors, the path forward depends on the pace of economic adjustment and the effectiveness of policy responses.