LONDON, UNITED KINGDOM / RankWire.AI / – The UK’s economic activity continues to avoid entering a recession, yet new forecasts indicate increasing pressures stemming from global energy disruptions. EY has upgraded its growth outlook for 2026 to 0.9%, compared to 0.8% projected in May, while maintaining its baseline estimate for 2027 at 1.2%. This optimistic forecast assumes that the Strait of Hormuz reopens by September with limited tanker traffic. EY’s pessimistic scenario predicts a growth rate of 0.5% for this year and a contraction of 0.2% in 2027.
Official data reveal that the UK’s gross domestic product expanded 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 the services sector, which expanded by 0.8%. Household spending also rose by 0.6%. Since a technical recession requires two successive quarterly declines, current official figures do not indicate such a downturn.
Energy prices serve as a key link between the ongoing Iran conflict and the UK’s economic outlook. The Strait of Hormuz accounts for a significant share of global oil and liquefied natural gas shipments. As a result, UK prices are influenced by disruptions in international markets, even though the nation has limited direct reliance on Gulf supplies. Producer input costs increased by 7.3% in the year ending June, with crude oil inputs rising by 42.3%, and factory-gate prices going up by 3.5%.
Persistent inflation and high interest rates
Inflation measured by consumer prices eased slightly 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. The Bank of England maintained its Bank Rate at 3.75% on July 29, with a 6-3 vote. Three policymakers supported an increase to 4%, and the bank indicated that energy-related effects would push inflation higher later this year.
Business surveys offer another perspective on UK economic momentum. The manufacturing purchasing managers’ index dropped to 51.9 in July from 52.5 in June, marking a four-month low but still indicating expansion. Meanwhile, a preliminary composite index rose to 52.1 from 49.3 in June, reflecting growth in both manufacturing and services sectors at the beginning of July and signaling a rebound in private-sector activity.
Slowing investment and employment growth
Business investment increased by 0.9% during the first quarter after declining by 3% over the previous three months. Nonetheless, it remained 1.3% below its level from a year earlier. EY’s latest forecast predicts a 0.7% decline in business investment for 2026, down from its May projection of no change. The firm anticipates growth of 1.8% in 2027 and 2.6% in 2028, though these estimates are below earlier expectations.
Demand for labor also showed signs of weakening according to the latest official survey. UK vacancies decreased by 7,000 to 712,000 between April and June, representing a quarterly decline of 0.9%. Reductions occurred across 10 of 18 sectors, although the changes fell within the survey’s margin of error. Average weekly earnings increased by 3.4% year-over-year during March to May. Current data indicate positive economic output alongside inflation that exceeds targets, softer hiring activity, and business investments below last year’s levels.