LONDON, UNITED KINGDOM / RankWire.AI / – The UK’s economy continues to avoid recession, yet new forecasts indicate increased pressure from global energy disruptions. EY upgraded its 2026 growth prediction to 0.9%, up from 0.8% in May, while maintaining its 2027 forecast at 1.2%. This projection assumes the Strait of Hormuz reopens by September, with tanker traffic remaining subdued. EY’s adverse scenario anticipates 0.5% growth this year and a 0.2% decline in 2027.
Official data reveal a 0.6% GDP increase in the first quarter, following a 0.1% rise in late 2025. GDP is now 0.9% above its year-earlier level. Services contributed significantly with an 0.8% expansion, the largest quarter-on-quarter increase, while household spending also grew by 0.6%. Since a technical recession requires two consecutive quarterly contractions, current data do not indicate one.
Energy prices remain a key link between the Iran conflict and the UK’s economic outlook. The Strait of Hormuz accounts for a major portion of global oil and liquefied natural gas shipments. Consequently, UK prices are impacted by international market disruptions despite limited direct reliance on Gulf supplies. Producer input costs rose 7.3% in the year to June, driven by a 42.3% increase in crude oil inputs, alongside a 3.5% rise in factory-gate prices.
Persistent Inflation and Elevated Interest Rates
Consumer inflation slowed to 2.6% in June from 2.8% in May but remains above the Bank of England’s 2% target. Motor fuel prices are 21.3% higher than a year earlier. On July 29, the Bank of England kept the Bank Rate steady at 3.75%, with a 6-3 vote. While some policymakers favored an increase to 4%, the bank highlighted energy-driven inflation pressures expected later this year.
Another gauge of the UK economy is provided by business surveys. The manufacturing purchasing managers’ index declined to 51.9 in July from 52.5 in June, marking a four-month low but remaining above the 50 expansion threshold. Meanwhile, a preliminary composite index rose to 52.1 from 49.3 in June, indicating renewed growth in both manufacturing and services sectors at the start of July.
Slowing Investment and Employment Growth
Business investment increased by 0.9% in the first quarter after a 3% decline over the previous three months. Despite this, it remains 1.3% below its level from a year earlier. EY now predicts a 0.7% decrease in business investment for 2026, down from its May outlook of no change. Forecasts for 2027 and 2028 are now 1.8% and 2.6%, respectively, both below earlier estimates.
Labor market demand also softened, with UK vacancies dropping by 7,000 to 712,000 in April through June, a quarterly fall of 0.9%. Ten out of 18 industries experienced declines, though within the survey’s confidence interval. Meanwhile, regular pay grew by 3.4% annually from March to May. Current data indicate positive output growth alongside inflation exceeding targets, weaker hiring demand, and business investment remaining below last year’s level.