Oil spike, falling demand: small firms face a perfect storm

The UK economy is edging towards a dangerous point, with fresh forecasts warning that the fallout from the Iran conflict could push growth to a standstill and send unemployment climbing. What looks stable today may prove short-lived, as rising energy costs, fragile consumer spending and business uncertainty begin to bite. For small and micro businesses, the risk is stark: a squeeze on all sides just as confidence and cashflow are already under strain.

Photo by Atik sulianami on Unsplash

The latest Item Club report sees the UK economy flatlining in the second and third quarters of 2026 as it deals with the consequences of the conflict in the Middle East. Energy prices are set to deliver the biggest hit since the pandemic to the jobs market. The independent forecasting group is predicting that the UK’s jobless figures will peak at 5.8 per cent by the middle of 2027, with almost 250,000 left out of a job.

The latest figures for the unemployment rate came in at 4.9 per cent when the Office for National Statistics (ONS) announced the figures on 21st April. That was an unexpected fall for the 5.2% of the previous month but the conflict in the middle East hadn’t been factored in by then.

Businesses have been left to deal with soaring energy prices after oil soared as high as $118 throughout the conflict. The Government ahs promised help for the 10,000 biggest energy using businesses but nothing for the rest. But the scheme, which the government claims will slash companies’ bills by up to 25 per cent, won’t kick in until next year by which time a lot of damage will have been inflicted on business, jobs and growth.

Ongoing high energy costs, disruption to supply chains, consumers with little spare spending money and ever-increasing wages and taxes, plus the uncertainty which saps businesses of the confidence to invest, will push the UK to the brink of a technical recession in the middle of this year.

The Item Club is also predicting that inflation will rise to almost four per cent in the second half of 2026, which makes cuts to interest rates much less likely.

All in all that’s not a good forecast. If the UK slips into recession in the middle of 2026, small and micro businesses will face a squeeze from all sides with a combination of falling demand, rising costs, tighter finance, and a tougher labour market.

A recession would hit consumer spending first. The oil‑price shock is already squeezing household budgets, and forecasters expect spending power to weaken further.

Operating costs would stay high even as revenue falls. The recession would not bring relief on costs. Energy prices remain elevated due to the Middle East disruption, and 25% of businesses already cite energy as a reason for raising prices, the highest since 2023. This creates the worst possible combination: falling sales + rising costs.

The labour market would tighten in a painful way driven increasingly by redundancies rather than new entrants. Hiring becomes easier as more people look for work but retention becomes harder as workers feel financial strain. Redundancies reduce local spending power further.

Finance becomes harder to get and is more personally risky. Small businesses are already turning to personal guarantees at record levels, with a 65% surge in Personal Guarantee Insurance applications and average loans hitting £330k. In a recession banks tighten lending criteria, and more owners are forced to secure loans against their homes. As cashflow gaps widen customers delay payments and investment plans are shelved which in turn increases the personal financial exposure of small‑business owners.

Prices become harder to raise despite the rising costs. ONS data shows only 11% of businesses increased their selling prices in February, despite 29% facing higher input costs. In a recession customers become extremely price‑sensitive so small business have to absorb the cost increases, margins shrink further and discounting becomes more common, especially in retail and hospitality all of which adds up to more insolvencies and redundancies.

As the downward spiral continues business confidence fall seven further. Confidence among small firms is already extremely low: only 38% of SMEs are optimistic about the UK economy heading into 2026. A recession would push this lower, leading to hiring freezes, reduced hours and investment and the inevitable shutting up of shops in all sectors.

If the UK enters recession in mid‑2026, small and micro businesses would face. This would be one of the toughest trading environments since the pandemic, especially for consumer‑facing, energy‑intensive, and low‑margin microbusinesses. Without our small and micro businesses, the recession deepens and lengthens because they are the heart of innovation and job creation. The Government may finally realise their value but only once they’ve gone.