The start of 2026 has been one that is full of surprises and uncertainty. The U.S. launched an attack on Iran with Israel unexpectedly, but then went to China to form better economic relationships. Reform UK has shown that they are gaining traction increasingly as the favourite political party within the U.K. At the same time, the UK economy has shown GDP growth of 0.6% in Q1 2026 - the largest of all the G7 countries.

In this issue of The Honest Economy, I explore those topics and the implications it could have on small businesses.

President Trump’s actions are always one that comes with strong elements of surprise. Earlier in the year, he gave the go-ahead to capture Venezuela’s president Maduro. Then he decided to launch a war campaign on Iran. Now he’s in China to build relationships politically and economically with President Xi.

You may think these things have little to do with your business, but in actual fact, they affect consumer behaviour significantly. When consumer behaviour changes, your business needs to adapt quickly to ensure it is resilient enough against this change.

Tariffs have been on the news for a long time now. A long standing policy of Trump’s belief that will help America. But how would this affect the UK?

China and the U.S. economy are simply the two largest economies in the world. Both countries combined together have an economy size larger than Europe itself. What does it mean? The output of the world’s products and services are largely driven in these two countries. Improved relationships between the two countries will improve productivity, fiscal policies on the world and unlock opportunities to have better trade with other countries.

Other countries have external benefits to improved relationships due to the opportunity to have lower costs of trade, better access to markets and support from these two countries as a whole. After all, China exports a large amount of raw materials to products used in common household items. If this was constrained then the country may be less willing to export if they can’t ensure the welfare growth of their own citizens.

However, the real stake is the discussion around technology and AI.

The news always reports the U.S. attempting to block and restrict access to China in accessing specific semi-conductors, technological models and software in a bid to protect their progression in AI research.

However, Trump has taken high profile technology CEOs (Elon Musk, Tim Cook and Jensen Huang) with him during his visit to China. What does this mean? The summit is undoubtedly going to be heavily focused on technological advancement for both countries.

Rare earth materials are required for physical builds of technological equipment. Knowledge and intellectual talent is required for advanced research. Both countries possess more of one over the other. But if this were to be combined, a new drive of technological growth will ripple through the world.

As a small business, technological advancement will improve the inefficiencies as well as lower the cost of operations. Regardless of what agreement or positive outcomes arise from the Beijing summit, the dependencies many small businesses have on technological advancements are still here. Supplier diversification or forward cost planning may be useful to ensure you focus on long term stability depending on how the two largest economies of the world evolves.

The headline looks great. The UK economy is growing, and by a significant amount compared to prior quarters. But if you dive into the underlying detail, it gets less reassuring the more you know…

The underlying economic trend has not seen growth this high since Q1 2022, which was 4 years ago. The average sits closer to 0.2% - 0.3% which is half the growth that is being reported.

The industries that contributed most to the 0.6% figures sits within transportation, manufacturing, repair and the overall automotive industry. There has been some contribution from technology and AI sectors but their growth follows closer to the 0.2% - 0.3% average trend.

In August 2025, there was a large cyberattack on Jaguar Land Rover. This is a key player of the automotive industry and the attack impacts all layers of the manufacturing companies, repairs and transportation. Supply chains were halted, productions stopped and a huge section of the automotive industry’s productivity fell sharply. Despite this, the UK economy still grew slowly in Q3 and Q4 2025. The effects of recovery are simply being baked in slowly again which now makes it feel as if there’s real growth when production returns to normal levels.

The Iran war only began at the end of February 2026. Oil prices rose sharply but this doesn’t wipe out the availability of oil overnight. Reserves are held by companies that use oil for production, meaning their reserves are still available for use.

Oil is a commodity that is continuously and resistant to fluctuations in price. Businesses that use oil will always find a way to price in the cost increases to pass onto consumers. There’s simply no way around it. Consumers are slowly adjusting to adapt to the increases in prices as a result of the war. This doesn’t happen quickly and it’s likely the effects of this will creep up during Q2 and Q3 of 2026.

Small businesses must be careful to assess this level of consumer behaviour as every household will be assessing their finances closely, finding what they can sacrifice in order to adapt to price increases. It may be a good time to reassess the pricing of your products and cost of your suppliers to see if savings or increases can be found to keep a healthy and sustainable margin.

With interest rates being currently held, most consumers and businesses are still waiting to see if the cost of borrowing will rise. However, as we’ve seen the inflation figures rising, it’s almost with certainty that interest rates will rise in order to tighten household spending and business borrowing.

There is a strong double whammy impact of supply cost increases and lower consumer spending. Scenario planning within your business to assess drops in revenue or increases in costs would be smart in this scenario, to ensure your business remains as stable during the economic downturns of the country.

Political instability is a real risk to the country and economy as a whole. When confidence is lost with governments, market conditions will worsen silently as they don’t make headlines. This situation matters largely to your financial health as fiscal policy instability can shake your P&L greatly.

There is a current gilt yield surge. The yield is the government’s cost of borrowing. Effectively the rate at what investors are expecting from borrowing to the government. A higher rate means less confidence in the government as they feel they are taking on a large risk.

But this matters to small businesses because it’s not simply the government that suffers a larger repayment of interest on loans. The cost of UK borrowing to businesses can also rise, and it gets hidden under the surface. You might ask why? It’s simply because those providing loans begin to view the country as a riskier country to borrow to and expect larger returns for the risk they now carry.

The pound also begins to weaken against other countries meaning purchasing power for imported good is weaker. Essentially, if you source materials from abroad, you will find it to be more expensive due to a weaker purchasing currency.

This is the Liz Truss mechanism unwinding again, but in slow motion.

At the time of writing, 77 Labour MPs have already publicly called out for Starmer’s resignation. This means that the government is effectively paralysed now. Half of the party who are questioning Starmer’s leadership are battling with the other half of the party that still support Starmer.

What does this mean? The government paralysis simply means that decisions are going to have power struggles and disagreements amongst multiple members of the party. New policies will get delayed, amendments to existing policies will be stuck in limbo and finances won’t be released to budget holders across the country easily. If your business depends on government subsidies, supply or provides you with a source of revenue, then you can expect this paralysis to have direct consequences on your company.

A new leader is not necessarily a good thing for stability either. The MPs challenging for the leadership position may loosen fiscal policy in an attempt to win more internal party support to garner votes. The markets currently have a high level of uncertainty in response to the leadership struggle.

This is all currently baked into the expected risk, which gives rise to an elevated level of government bond yields. Any more fiscal loosening that isn’t the correct economic choice, will drive this cost of borrowing for the government even higher, eventually causing a problem for small businesses that rely on some form of leverage.

But all this being said, fiscal uncertainty isn’t a reason to panic immediately. It may be a time to review your business’ sensitivity to interest rates as well as any expiring debt covenants.

Most of the current world issues and political shifts are boiling down to consumer behaviour shifting significantly within the next few quarters.

Look at your business’ finance today. How healthy are your margins as it stands? Is your business resilient to the political shifts? How can you protect your business to ensure your consumers still consistently remain purchasing with you? Try to measure scenarios of what changes a 0.5% interest rate rise could mean for your business.

I’ve summarised all the above into a table below so you can refer back to it as you wish: