Yesterday’s UK construction purchasing managers’ index data was stark evidence – if it were needed – of the impact the Iran war is already having on the UK economy. It recorded output declining, with the index at its lowest since the pre-Budget downturn last November – a whisker away from being the lowest since the covid crisis.

The cause? Emptying order books amid sharply rising construction prices linked to the increasing cost of oil, according to S&P Global, which runs the index. Tim Moore, economics director at S&P Global Market Intelligence, said: “Aside from the post-pandemic surge in input prices from early-2021 to mid-2022, the latest rise in purchasing costs was the steepest in three decades of data collection.”

Last week, the price of oil hit $126 per barrel, its highest since the early days of the Ukraine war. While it has since come down amid current talk of an imminent deal, previous hopes of ending the war have proved illusory. The potential global impacts of oil priced at that level are enormous, ranging from food supply to, of course, the economy.

Nobel Prize-winning economist Paul Krugman said recently that “a full-on global recession is more likely than not” if the Strait remained closed for another three months. He is not alone: A report by Oxford Economics, modelling a “prolonged war” scenario, said this would cause oil prices to hit nearly $200 per barrel, “tip[ping] the world into outright contraction”.

The impacts are already being felt in the UK development and construction sector. A slew of trading updates from housebuilders in recent weeks has flagged increasing build costs coming down the line, and the first signs of nervousness from buyers, with Taylor Wimpey reporting a 1% price drop. Crest Nicholson has already been so badly hit by the stalling land market that it is in discussions with its lenders to relax its loan covenants.

Building now understands that some in the listed housebuilding sector are modelling worst-case scenarios of potential build cost rises next year of up to 25%. The question, then, on everyone’s lips, is how damaging is the current situation? And, further, how bad might it be if it continues?

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