LONDON, UNITED KINGDOM / RankWire.AI / – The UK’s economy continues to avoid recession, yet new forecasts highlight mounting pressure from global energy disruptions. EY has increased its growth projection for 2026 to 0.9% from 0.8% in May, while maintaining its baseline estimate for 2027 at 1.2%. This forecast assumes the Strait of Hormuz reopens by September with limited tanker traffic. EY’s adverse scenario predicts a growth of 0.5% this year and a 0.2% contraction in 2027.
Official data reveal that gross domestic product grew by 0.6% in the first quarter, following a 0.1% increase in late 2025. The GDP was 0.9% higher than its level a year earlier. The largest contribution to quarterly growth came from services, which expanded by 0.8%. Household consumption also rose by 0.6%. The current official figures do not indicate a technical recession, which requires two consecutive quarterly contractions.
Energy prices serve as the key link between the Iran conflict and the UK’s economic outlook. The Strait of Hormuz plays a significant role in the transportation of global oil and liquefied natural gas shipments. Consequently, British prices reflect disruptions in international markets, despite the country’s limited direct dependence on Gulf supplies. Producer input costs increased by 7.3% in the year to June, with crude oil inputs rising by 42.3%, and factory-gate prices up by 3.5%.
Persistently High Inflation and Interest Rates
Consumer inflation slowed to 2.6% in June from 2.8% in May, yet remained above the Bank of England’s 2% target. Motor fuel prices were 21.3% higher than a year earlier. On July 29, the Bank of England kept the Bank Rate steady at 3.75% following a 6-3 vote. Three policymakers favored an increase to 4%, while the bank indicated that energy effects would push inflation higher later in the year.
Survey data from businesses offer another perspective on UK economic momentum. The manufacturing purchasing managers’ index declined to 51.9 in July from 52.5 in June, representing a four-month low but still above the expansion threshold of 50. Meanwhile, a preliminary composite index increased to 52.1 from 49.3 in June. This index, which covers both manufacturing and services sectors, suggests renewed private-sector growth at the start of July.
Slowing Investment and Employment Growth
During the first quarter, business investment increased by 0.9% after declining by 3% over the previous three months. Despite this growth, investment remained 1.3% below its level from a year earlier. EY now anticipates a 0.7% decrease in business investment throughout 2026, a revision from its May forecast of no change year-over-year. Looking ahead, EY projects growth rates of 1.8% in 2027 and 2.6% in 2028, both below earlier estimates.
Latest official data also reflect a weakening in labor demand. UK vacancies dropped by 7,000 to 712,000 during April through June, representing a quarterly decline of 0.9%. Job openings declined across 10 of 18 industries, although within the survey’s confidence interval. Meanwhile, regular pay increased by 3.4% annually from March to May. Overall, the data show positive economic output, but with inflation still above target, softer hiring demand, and business investment lower than last year’s levels.
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