For many UK businesses, growth plans for 2026 will have been set against a relatively stable set of assumptions: easing inflation, lower borrowing costs and a gradual return to normality in the form of more predictable trading conditions.
However, in recent months, that picture has shifted seismically - showing that even the most finely-tuned forecasts are based on presumptions, not prescience.
As a result of the conflict in the Middle East, the Organisation for Economic Co-operation and Development (OECD) now expects UK growth to fall to 0.7%, down from prior forecasts of 1.2%. This is singularly the largest downgrade among G20 economies, as reported by BBC News. Inflation expectations have also been revised upwards, with knock-on effects for interest rates and business costs.
More broadly, the International Monetary Fund (IMF) has warned that the economic impact of the conflict is likely to leave persistent “economic scars” on global growth prospects, as reported in The Guardian.
This does not mean growth is no longer achievable, of course. However, it does mean that the assumptions underpinning many existing business plans may no longer hold, and will need to be thoroughly reconsidered.
The most immediately pressing impact of the Iran War and the on/off closure of the Strait of Hormuz has been on energy markets. Disruption to supply routes, especially one as internationally critical as this, has pushed up wholesale oil and gas prices, feeding quickly into increased fuel, transport and operational costs.
That pressure is pronounced and is already being felt not only in the UK, but across the world. Businesses are now facing much steeper input costs alongside a more volatile pricing environment that shows little sign of stabilising. At the same time, rising inflation reduces the likelihood of near-term interest rate cuts, increasing the cost of borrowing and tightening financial conditions.
For businesses that took the time to build growth forecasts last year on the (entirely reasonable) expectation of falling costs and improved access to finance, this represents a distinctly unwelcome material shift.
In this fluctuating economic environment, relying on a single growth forecast is increasingly risky. Businesses must now employ a more resilient approach, ensuring that they stress test their plans against a range of scenarios.
At a minimum, businesses should be asking:
This is not about predicting the future precisely, but about implementing informed and educated options. With so much uncertainty, businesses must understand a much broader range of possible outcomes and take care to ensure they are prepared for each.
Scenario planning, which may once have been seen as theoretical, is now a practical necessity that cannot be sidelined.
One of the more difficult balancing acts businesses must now address is how to maintain growth ambitions while protecting profitability.
As reported by the BBC, evidence from major retailers suggests that many are initially absorbing increased costs, holding price rises as a contingency rather than an immediate response. This can only ever be a short-term measure, however, and reflects a broader challenge across the market: pass on too much cost, and demand is likely to weaken; absorb too much, and margins inevitably erode.
There is no single answer, but there are clear areas for companies to review:
Higher and more volatile costs invariably have implications for investment, especially when combined with amped up uncertainty around interest rates.
Projects that appeared entirely viable under previous assumptions may now need to be reassessed, and in some instances, revisited entirely. This does not mean investment should be paused completely, but expected returns, timelines and funding structures should be reviewed very carefully.
In particular, businesses should scrutinise their books to consider whether planned investments remain viable under more conservative assumptions. To what extent do projects rely on external financing? And, more practically, would easing or actively delaying certain elements reduce risk without halting progress entirely?
In many cases, the objective is seldom to scale back ambition, but to ensure it is supported by financial planning that is rooted in reality.
Even while the outlook is more arduous, growth remains possible - but with certain caveats that must be taken into account.
For example, OECD forecasts assume that the current disruption in energy markets will ease over time. However, this cannot be guaranteed. By extension, businesses that are able to respond quickly, adjust plans and make decisions based on changing data will be much better placed to navigate increasing uncertainty than those relying on a fixed baseline.
With the right approach, economic uncertainty does not automatically have to stall progress. A robust and flexible growth plan, crafted with better-informed decision-making at its heart, enables UK businesses to circumvent challenging economic conditions.
Duncan & Toplis provides tailored advice on reviewing your growth plans and navigating economic uncertainty. Contact us to find out more.
