LONDON, UNITED KINGDOM / RankWire.AI / – The UK’s economic activity continues to avoid recession, yet new forecasts indicate mounting pressure from global energy supply disruptions. EY has increased its growth projection for 2026 to 0.9% from 0.8% in May, while maintaining its 2027 baseline at 1.2%. This forecast assumes the Strait of Hormuz reopens by September with subdued tanker traffic. EY’s downside scenario estimates 0.5% growth this year and a 0.2% contraction in 2027.
Official statistics reveal that gross domestic product grew by 0.6% in the first quarter, following a 0.1% increase in late 2025. The GDP is now 0.9% higher than its level a year earlier. Services sector expansion contributed significantly with an 0.8% rise, making it the main driver of quarterly growth. Household consumption also grew by 0.6%. A technical recession requires two successive quarterly contractions, which current official data do not indicate.
Energy prices are central to the link between the Iran conflict and the UK’s economic outlook. The Strait of Hormuz accounts for a substantial share of global oil and liquefied natural gas shipments. Consequently, UK prices reflect international market disruptions, despite limited direct reliance on Gulf supplies. Producer input costs increased by 7.3% in the year to June, with crude oil inputs rising 42.3%, and factory-gate prices climbing 3.5%.
Inflation and interest rates remain high
Consumer price inflation slowed to 2.6% in June from 2.8% in May. Despite this easing, the rate stays above the Bank of England’s 2% target. Motor fuel prices are now 21.3% higher than a year earlier. The Bank of England kept the Bank Rate steady at 3.75% on July 29 with a 6-3 vote. Three policymakers preferred an increase to 4%, with the bank noting that energy effects would likely boost inflation later this year.
Business surveys offer another perspective on the UK economy’s pace. The manufacturing purchasing managers’ index declined to 51.9 in July from 52.5 in June, reaching a four-month low but still above the 50 mark indicating growth. Meanwhile, a preliminary composite index increased to 52.1 from 49.3 in June, covering both manufacturing and services sectors, signaling renewed private-sector expansion at the start of July.
Investment activity and employment growth slow down
Business investment increased by 0.9% during the first quarter after dropping 3% in the previous three months. Despite this rise, investment levels remain 1.3% below what they were a year earlier. EY now predicts a 0.7% decrease in business investment for 2026, a shift from its May forecast of no change. For 2027, EY expects growth of 1.8%, followed by 2.6% in 2028, both lower than earlier estimates.
Labour market demand shows signs of softening according to the latest official data. UK vacancies decreased by 7,000 to 712,000 from April to June, reflecting a quarterly fall of 0.9%. Reductions occurred across 10 of 18 industries, although the movements stayed within the survey’s confidence interval. Regular pay increased by 3.4% annually from March to May. The current data depict positive output alongside inflation exceeding targets, subdued hiring activity, and business investment below last year’s levels.