The Middle East conflict has once again brutally exposed the Achilles’ heel of the global economy. Like Russia’s invasion of Ukraine four years ago, the disruption to key oil and gas supply chains has sent energy prices spiralling, markets tumbling, and businesses staring down the barrel of another cycle of heavy inflationary pressures.
As a net energy importer, the UK is particularly exposed. The IMF suggests that the country faces the biggest hit to growth from conflict in the Middle East of all the world’s major economies, revising down its output forecast for 2026 from a 1.3% increase to 0.8%.
The 50% spike in oil prices caused by the near closure of critical transportation routes through the Strait of Hormuz has triggered 10%-20% increases in petrol and diesel prices on UK forecourts. That puts a direct squeeze on transportation costs for goods. More indirectly, higher fuel prices mark another hit to already fragile consumer confidence and spending.
As for natural gas, although only a small percentage of the UK’s imports come directly from the Middle East, the country is vulnerable to wider supply chain disruptions because of its relatively small reserve storage capacity. Domestically, gas is still far and away the biggest fuel source for heating and hot water supply and continues to have a big impact on electricity prices.
In industry, as well as being used to heat premises, gas is an important energy source for a wide range of processes. Energy can account for up to a fifth of production costs in heavy industrial sectors like steel, meaning price spikes can threaten to wipe out margins quickly. Elsewhere, the chemicals industry relies on oil and gas as raw materials as well as fuel sources. Production output from the UK chemical industry has already fallen 60% since 2021. The Middle East is also a major hub for fertilisers, with supply chain disruptions adding to the cost pressures faced by farmers.
Because of its impact on key input costs like production and transportation, energy price rises are a major driver of inflation. While there had been hopes of inflation easing towards 2% over the course of 2026, it’s expected that the Bank of England may now have to increase interest rates again just to hold CPI steady between 3%-3.5%. The higher cost of borrowing will mean a further cost increase for businesses with existing debts to service, while for others it’s likely to lead to investment plans being deferred or shelved, slowing growth.
Financial protection strategies at times of conflict
Business leaders have no control over geopolitical events like the conflict in the Middle East. All they can do is protect themselves as best they can from the economic fallout.
There are various ways British businesses can build financial resilience during this period of volatility. The first priority is to assess where cost increases could hit and where the vulnerabilities in your business lie. Plan out different possible scenarios to analyse their impact in an audit-like way. From there, you can update risk assessments and forecasting models accordingly and then move analysis into action.
How you prioritise your actions very much depends on where vulnerabilities exist. If you are worried about cash flow amidst rising costs, then tighten up credit control procedures and look at other ways to bolster working capital. If your business carries a sizeable debt burden, look at when terms expire and plan early for potential higher costs when it comes to renewal. The same goes for energy deals. Providers are pulling long-term fixed-rate deals from the market amidst the uncertainty, so be prepared for cost increases when the time comes to renew.
To cope with those increases, you may have to consider your pricing strategy – although passing on all extra costs to customers is risky at a time when consumers are also feeling the squeeze and looking for the best deals possible. This is when it becomes important to track profitability accurately across all product lines and focus on areas that give you the optimum balance of volume and margin.
Regardless of how long the conflict itself lasts, the economic fallout from the Middle East conflict is likely to stretch into months, if not years. Early action to prepare your business will be critical to riding out whatever turbulence lies ahead. With that in mind, now is the right time to seek professional financial advice to assess your exposure to energy price increases, interest rate rises and other inflationary pressures.
