How could the Gulf Conflict boost the UK economy?

 

 

How could the Gulf Conflict boost the UK economy?

 

 

There has been a lot of discussion in the media about the risk of a recession due to the Gulf conflict. The UK economy was already slowing down, and this situation is adding more pressure. In the short term, this is likely to show up in several ways:

• Higher inflation, with rising costs for food, petrol, and heating
  • Interest rate cuts being cancelled, with a chance rates could rise instead
  • Rising unemployment, especially in the hardest-hit sectors
  • Increased government borrowing to support the economy

At first, this all sounds quite negative. However, the situation could also create opportunities to support growth, if policymakers act in the right way. There are a few key areas to watch.

1. North Sea Oil & Gas Licensing

There is a growing disagreement within the government about whether to allow new oil and gas drilling in the North Sea. Some are strongly against it, but the longer the conflict continues, the harder that position may be to maintain.

If policy changes, it could lead to:

• More jobs, especially in Scotland
  • Less need to import oil and gas
  • Improvements in the UK’s balance of payments

2. Defence Investment Plan

A new Defence Investment Plan is expected soon, explaining how future defence spending will be funded. The Ministry of Defence has already identified a funding gap of nearly £17 billion, and the Treasury has so far been cautious about committing funds.

With global tensions rising, the government may have little choice but to increase defence spending. This could:

• Support the UK’s defence industry
  • Boost the wider economy through higher spending

3. UK Trade Strategy: US vs EU

Recent tensions with the United States, including tariffs and political disagreements, have raised questions about relying too heavily on closer UK-US ties.

As a result, the UK may:

• Strengthen its relationship with the European Union
  • Find the EU more open to cooperation than before
  • Work more closely in areas like Life Sciences, Energy, and Defence

Although some issues like fisheries remain difficult, there is still plenty of room to improve cooperation.

4. Relationship with China

China has recently acted as a stabilising force in global events and helped support a ceasefire. It has also launched a new payments system called CIPS, similar to SWIFT.

For the UK, this could lead to an opportunity to fully integrate CIPS, meaning:

• A chance for London to play a key role in global finance
  • Easier trade between the UK and China
  • More foreign investment

In the past, the US discouraged closer UK-China ties. However, recent events may lead the UK to rethink this approach.

In Summary, one simple way to judge government policy is by looking at 10 year government bond yields. Right now, it is expensive for the government to borrow money, which reflects higher risk, where higher yields mean higher borrowing costs.

Nonetheless, whilst short term changes can be driven by global events, long term trends are shaped by economic policy. With that, the takeaway is, the direction of travel of the bond markets, is increasingly the most reliable indicator as the effectiveness of UK policy. If the UK does nothing, the economic outlook will only worsen. Whether it can grasp the opportunities emerging from this crisis though, is a wholly different question.

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