16 March 2026: Britain now has a chance to influence the direction of the war in Iran

The UK economy unexpectedly did not grow in January as the main services sector struggled, marking a lacklustre start to the year, even before the Middle East war triggered a new global energy shock.

The flatline registered in the month was below the 0.2 percent expansion forecast by economists in a Reuters poll and December’s 0.1 percent growth.

The data highlights the challenges the Chancellor faces as she tries to revitalise an economy in which businesses and households will now have to cope with rising oil and gas prices.

The services sector saw no growth in January, according to data from the Office for National Statistics, while industrial production shrank by 0.1 percent. Weakness among recruiters and employment agencies meant the employment sector was the biggest drag on the economy.

Activity in the food and beverage services sector, including pubs and restaurants, also declined during the month. While that is normal for January, following the Christmas and New Year celebrations, the fall was slightly larger than in previous years.

The data further complicates the Bank of England's challenge. It is now expected to keep interest rates at 3.75 percent when the Monetary Policy Committee meets later this week.

The pivot reflects the changing outlook for energy costs amid soaring oil and gas prices in recent weeks, and the potential for these higher costs to weigh on UK inflation.

The Bank had previously expected CPI inflation to fall to close to 2% by next month. Still, experts say price rises could accelerate towards the second half of the year if higher wholesale gas and oil prices feed through into steeper household electricity and fuel costs.

EU students would pay lower university tuition fees under plans being considered by Downing Street to secure closer post-Brexit trading ties. The Treasury is estimating costs for the policy, which they hope to use as a bargaining chip in negotiations with Brussels over market access.

The move is part of Rachel Reeves’s new initiative for a Brexit reset that will realign Britain with EU rules and regulations, which she will outline in a speech tomorrow.

Since Brexit, Europeans have been paying overseas fees at UK universities that can reach up to £38k a year, compared with £9.5k for domestic students.

Brussels wants EU nationals to pay the same fees as British students and has signalled it could block Sir Keir Starmer’s reset plans unless he concedes to its demands.

The split over tuition fees has disrupted plans to reset relations and has left negotiations over a youth mobility scheme at a standstill.

British officials have previously described the demand as a “non-starter” but are now considering an about-turn if the EU makes a “very big” counter-offer. A government spokesman insisted that EU students would not be offered domestic fees as part of any final deal, but left open the possibility that Brussels could be offered a discounted rate compared to overseas fees.

Equalising fees would cost British universities an estimated £140m a year in lost income, potentially requiring the Treasury to cover the shortfall.

No agreement was reached on reducing tuition fees during the “common understanding” agreement between the two sides last May, but it remains part of the European Council’s negotiating mandate.

The planned youth mobility scheme would allow UK and EU young people under the age of 35 to work and study in each other’s countries for a set period without needing a visa.

The UK believes any scheme should have an annual cap on the number of places, a work-and-study period limited to two years, and no reduction in tuition fees.

The pound slipped against the U.S. dollar over the past week, ending slightly weaker after a steady drift lower. The overall move was small, but the trend leaned downward, reflecting a softer GBP tone against a firm USD backdrop. It fell to a low of 1.3218 and closed at 1.3222.

The US economy grew at an annualised rate of just 0.7% in the fourth quarter of 2025, according to revised figures that show exports, consumer spending, and investment were lower than previously thought.

Friday’s figure from the Bureau of Economic Analysis was revised down sharply from the 1.4% initial estimate released last month and is well below the previous quarter’s 4.4% growth rate.

The revision suggests the world’s biggest economy ended 2025 in a far weaker shape than economists had previously thought, amid growing questions about the resilience of consumer spending, and businesses facing the cost of tariffs added to the import costs of both raw materials and finished goods, many of which have been absorbed by importers.

The BEA said a downward revision reduced the net trade figure for services exports. Consumer spending on services, particularly in healthcare, was lower than initially reported. Business investment in manufacturing was weaker than initial estimates suggested.

The Federal Reserve was already managing a delicate balancing act; the war over Iran is making it even more difficult.

Policymakers at the Central Bank had been expected to hold interest rates steady at 3.50-3.75% this week. Still, the broadening conflict in the Middle East now complicates matters and heightens confusion over the dual mandate.

The conflict in Iran and President Trump's tariffs and trade policies may take a back seat to an impending change at America's leading financial institution. President Donald Trump nominated Jerome Powell in 2017 to replace former Fed Chair Janet Yellen. Powell was officially sworn in as Fed chair on 5 February 2018 and was reappointed for a second term by former President Joe Biden in 2022.

However, since Trump began a non-consecutive second term, he has been highly critical of the FOMC’s approach to interest rates, which he blames on Powell. While Trump favours steep interest-rate cuts to boost lending and employment, Powell insists that the 12-person FOMC will rely on economic data to make its decisions.

It has been clear for some time that Trump would not be nominating Jerome Powell for a third term. Exactly two months from now, on 16 May, Powell's second term will end. This change, though anticipated for months, occurs during a particularly fragile period for the Federal Reserve and the stock market.

Jerome Powell has the lowest average dissent rate per FOMC meeting among recent Fed chairs. This is a reasonable indication that he has performed competently as the Federal Reserve's leader.

Although there may have been policy errors, it is always easier to criticise in hindsight.

Trump’s nomination of Kevin Warsh to replace Powell was a fairly non-controversial choice. Still, Trump's indictment of Powell over the $ 2.5 billion renovation of the Fed’s Head Office has run into unexpected difficulties.

While Senator Thom Tillis has no particular issue with Warsh, in fact, he believes he is the right man for the job, he is blocking approval of his nomination until the Administration drops any legal case against Powell.

Warsh's voting record during his previous five-year tenure as a voting member of the FOMC has historically been expensive for the stock market.

Throughout the financial crisis, his commentary and voting record consistently prioritised price stability over concerns about unemployment. Supporting higher interest rates to keep inflation low earned Warsh the "hawk" label.

There are rumours that Warsh has signed an agreement to ensure that he will be instrumental in lowering interest rates, at least during the remaining 2 1⁄2 years of Trump’s term.

The Dollar Index strengthened last week, continuing a multi‑week upward trend, with gains accumulating over the past four weeks. It snapped the 100 barrier to 100.54 and closed at 100.50, reflecting its safe-haven status as the Iran war continued.

Global Central Banks are assessing war-driven inflation risks as the law of unintended consequences careens around the world, spiking oil prices.

Central banks from Washington, London, Tokyo and Frankfurt, among others, are about to make their first assessments of economic damage after more than two weeks of conflict between the US and Iran.

Officials at the European Central Bank are widely expected to keep the deposit rate unchanged on Thursday. However, the Middle East crisis has all but dislodged the Central Bank’s policy from the “good place” that ECB President Christine Lagarde and colleagues claimed to inhabit.

The rise in energy prices, which has prompted expectations of interest rate increases, places the responsibility on the Governing Council to explain how inflation risks have changed and to give clues about how close they are to meeting those market expectations.

The European Central Bank is once again facing the possibility that an external energy shock could spill over into broader inflation, with policymakers signalling a much more cautious approach on rates as geopolitical tensions in Iran unsettle markets.

Peter Kazimir, Governor of the Slovenian Central Bank, said the conflict’s impact on prices could force the ECB to raise borrowing costs sooner than many had expected. While he argues there is no need to act at next week’s meeting, he makes clear that the balance of risks has shifted sharply upward and that policymakers must stay ready to respond quickly if necessary.

Kazimir’s message was notably more hawkish than the market had been pricing only weeks ago.

He said discussions about an inflation undershoot no longer make sense and added that considerations of further rate cuts are now definitively off the table.

His concern extends beyond headline energy prices. In his view, the greater risk is that businesses, having endured the inflation surge of recent years, may now pass higher input costs to consumers more swiftly. At the same time, workers might demand higher wages sooner than before.

That kind of second-round effect is exactly what Central Banks fear, as it can turn a temporary shock into a more persistent inflation cycle.

For several decades, Germany stood as Europe’s economic growth engine and a pillar of financial stability.

However, over the last decade, structural headwinds have materialised, originating two decades ago in strategic decisions by the government. The impact and challenges today include excessive red tape and tax burdens, energy supply bottlenecks, and the insufficient adaptation of leading sectors to a rapidly changing global landscape.

As a result, Germany’s economy has underperformed, with real GDP remaining almost unchanged in the last 6 years. This compares poorly with the 14.9% expansion in the US, or even the 6.8% growth in the rest of the Euro area, during the same six-year period.

The current administration, led by Chancellor Friedrich Merz, could signal a turning point in economic policy and performance. Germany had prioritised fiscal discipline and debt sustainability.

By contrast, the new government has proposed a substantial multi-year fiscal expansion programme that could reach EUR 1 trillion, including infrastructure and defence. The policy shift could mark a turning point for the German economy and has already resulted in improved growth expectations and investor sentiment.

The Bloomberg Consensus Survey aggregates forecasts from economists and research institutions, providing a benchmark for evolving growth expectations. After a 0.5% contraction in the German economy in 2024 and a marginal 0.2% growth in 2025, the survey indicates improving trends, with growth rates of 1% and 1.5% for 2026 and 2027, respectively.

Germany might be entering a new expansion phase, supported by cyclical tailwinds and a shift in fiscal policy that sees it regain its place in the European Union.

The euro slipped last week, falling below its medium-term level of support at 1.1450

The single currency fell to 1.1410 and closed at 1.1417.

Have a great day!