LONDON, UNITED KINGDOM / RankWire.AI / – The UK’s economy remains out of recession, yet new forecasts indicate mounting pressure from global energy disruptions. EY increased its growth projection for 2026 to 0.9%, up from 0.8% in May, while maintaining its baseline estimate for 2027 at 1.2%. This outlook assumes the Strait of Hormuz reopens by September with reduced tanker traffic. EY’s worst-case scenario predicts 0.5% growth this year and a 0.2% decline in 2027.
Official data reveal that 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 the same period last year. The largest contribution to quarterly growth came from services, which rose by 0.8%. Household consumption also grew by 0.6%. Since two consecutive quarterly declines are needed to define a technical recession, the current official figures do not indicate such a downturn.
Energy costs serve as the key connection between the Iran conflict and the UK’s economic outlook. The Strait of Hormuz accounts for a significant portion of global oil and liquefied natural gas shipments. As a result, British prices are influenced by disruptions in international markets despite the UK’s limited direct reliance on Gulf supplies. Producer input prices increased by 7.3% over the year ending in June, with crude oil inputs surging by 42.3%, and factory-gate prices climbing by 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 have increased by 21.3% compared to 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 favored raising it to 4%, while the bank indicated that energy-related factors would push inflation higher later this year.
Secondary indicators of UK economic activity come from business surveys. The manufacturing purchasing managers’ index dropped to 51.9 in July from 52.5 in June. This reading, while marking a four-month low, remains above the 50 threshold that signals expansion. Meanwhile, a preliminary composite index increased to 52.1 from 49.3 in June, reflecting renewed growth in the private sector at the start of July. The composite includes manufacturing and services sectors.
Business investment and employment growth lose momentum
Business investment grew by 0.9% in the first quarter, following a 3% decline in the previous three months. Nonetheless, it was still 1.3% below its level from one year earlier. EY now predicts a 0.7% decrease in business investment for 2026, adjusting its May forecast of no change. The firm anticipates growth rates of 1.8% in 2027 and 2.6% in 2028, which are lower than its earlier estimates.
The latest official survey also shows a softening in labour demand. UK vacancies decreased by 7,000 to 712,000 during April through June, a quarterly drop of 0.9%. This decline was seen across 10 of 18 industries, although the change remained within the survey’s confidence interval. Regular pay increased by 3.4% annually between March and May. Current data point to positive output, despite inflation surpassing targets, with softer hiring demand and business investment remaining below last year’s levels.