LONDON, UNITED KINGDOM / RankWire.AI / – The UK economy continues to avoid recession, although new forecasts indicate increasing pressure from global energy disruptions. EY increased its growth projection for 2026 to 0.9% from 0.8% in May and maintained its 2027 baseline at 1.2%. This forecast assumes the Strait of Hormuz will reopen by September, resulting in reduced tanker traffic. EY’s downside scenario estimates 0.5% growth this year and a 0.2% contraction in 2027.
Official data reveal a 0.6% rise in gross domestic product during the first quarter, following a 0.1% increase in late 2025. The GDP is now 0.9% higher than its level a year earlier. The services sector grew by 0.8%, making the biggest contribution to quarterly growth, while household spending increased by 0.6%. A technical recession would require two consecutive quarterly contractions, which the current official figures do not demonstrate.
Energy prices are a key link connecting the Iran conflict to the UK’s economic outlook. The Strait of Hormuz handles a significant portion of global oil and liquefied natural gas shipments. As a result, UK prices mirror disruptions in international markets despite the country’s limited direct dependence 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 climbing by 3.5%.
Inflation and interest rates stay high
Consumer inflation eased to 2.6% in June from 2.8% in May, yet it remains above the Bank of England’s 2% target. Prices for motor fuels increased by 21.3% compared to the previous year. The Bank of England held its Bank Rate steady at 3.75% on July 29, with a 6-3 vote. While three policymakers advocated for a rise to 4%, the bank indicated that energy-related factors will push inflation higher later this year.
Business surveys serve as an additional gauge of the UK’s economic momentum. The manufacturing purchasing managers’ index declined to 51.9 in July from 52.5 in June, marking a four-month low but still above the 50-point threshold indicating expansion. Meanwhile, a preliminary composite index increased to 52.1 from 49.3 in June. This composite measure, which covers manufacturing and services, suggests that private-sector growth resumed at the beginning of July.
Investment and employment growth slow down
During the first quarter, business investment grew by 0.9%, following a 3% decline in the previous three months. Nonetheless, investment levels remain 1.3% below those of a year earlier. EY has now revised down its forecast for business investment in 2026 to a 0.7% decline, compared to its May projection of no change. The firm projects growth rates of 1.8% for 2027 and 2.6% for 2028, both below earlier estimates.
Demand for labor has also softened according to the latest official survey. UK vacancies dropped by 7,000 to 712,000 in the April through June period, reflecting a quarterly decrease of 0.9%. This decline affected 10 out of 18 sectors, though the variation stayed within the survey’s confidence interval. Regular pay increased by 3.4% annually between March and May. Current data indicate positive output alongside inflation exceeding targets, but with softer hiring activity and business investment remaining below last year’s levels.