LONDON, UNITED KINGDOM / RankWire.AI / – The UK economy is avoiding recession, yet new projections highlight increasing pressure from global energy disturbances. EY has upgraded its growth forecast for 2026 to 0.9% from 0.8% in May, while maintaining its baseline for 2027 at 1.2%. This outlook presumes the Strait of Hormuz reopens by September with limited tanker traffic. EY’s downside scenario anticipates 0.5% growth this year and a 0.2% contraction in 2027.
Recent official data reveal that gross domestic product expanded by 0.6% in the first quarter, following a 0.1% increase in late 2025. GDP was 0.9% higher than the same period last year. The largest contribution to quarterly growth came from services, which grew 0.8%, while household consumption also went up by 0.6%. Since a technical recession requires two consecutive quarterly declines, current official figures do not indicate such a scenario.
Energy costs are the key link connecting the Iran conflict to the UK’s economic prospects. The Strait of Hormuz is a major route for global oil and liquefied natural gas shipments. Consequently, British prices mirror disruptions in international markets, despite the UK’s limited direct dependence on Gulf supplies. Producer input prices rose 7.3% in the year to June, with crude oil inputs increasing by 42.3%, and factory-gate prices rising 3.5%.
Inflation and interest rates remain high
Consumer inflation slowed to 2.6% in June from 2.8% in May, yet it still exceeds the Bank of England’s 2% target. Motor fuel prices are 21.3% higher than a year earlier. The Bank of England maintained the Bank Rate at 3.75% on July 29, with a 6-3 vote. While three policymakers supported raising the rate to 4%, the bank noted that energy effects would push inflation higher later in the year.
Business surveys offer an additional perspective on UK 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 indicating expansion, as readings above 50 denote growth. Meanwhile, a preliminary composite index increased to 52.1 from 49.3 in June, reflecting renewed private-sector growth at the start of July, as it combines manufacturing and services data.
Investment and employment growth slowdown
Business investment grew by 0.9% during the first quarter after falling 3% in the previous three months. Nonetheless, it remained 1.3% below its level from the same period last year. EY’s latest forecast predicts a 0.7% decline in business investment for 2026, contrasting with its May projection of no change. The firm now expects growth of 1.8% in 2027 and 2.6% in 2028, both lower than earlier estimates.
Demand for labor also weakened according to the latest official survey. UK job vacancies dropped by 7,000 to 712,000 during April through June, representing a quarterly decrease of 0.9%. The decline was observed across 10 of 18 sectors, though within the survey’s confidence interval. Average weekly earnings grew by 3.4% annually from March to May. The latest data show positive economic output alongside inflation above target, with softer hiring activity and business investment lower than last year’s level.