LONDON, UNITED KINGDOM / RankWire.AI / – Although the UK economy has avoided slipping into recession, new forecasts indicate increasing pressure from global energy disruptions. EY has upgraded its growth projection for 2026 to 0.9% from 0.8% in May, while maintaining its baseline for 2027 at 1.2%. This forecast presumes that the Strait of Hormuz reopens by September with limited tanker traffic. EY’s more cautious scenario estimates 0.5% growth this year and a 0.2% decline in 2027.
Official statistics 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. Growth was primarily driven by an 0.8% rise in services, which made the largest contribution to quarterly expansion. Household consumption also grew by 0.6%. Currently, official data do not show two consecutive quarterly contractions, which would define a technical recession.
The main link between the Iran conflict and the UK’s economic outlook remains energy prices. The Strait of Hormuz accounts for a significant portion of global oil and liquefied natural gas shipments. As a result, UK prices reflect 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. Inputs for crude oil rose by 42.3%, and factory-gate prices advanced by 3.5%.
Inflation and interest rates remain high
Consumer inflation eased slightly to 2.6% in June from 2.8% in May, but it still exceeds the Bank of England’s 2% target. Prices for motor fuels increased by 21.3% compared to the previous year. On July 29, the Bank of England kept Bank Rate steady at 3.75%, with a 6-3 vote. Three policymakers supported raising the rate to 4%, and the bank indicated that energy price effects would push inflation higher later this year.
Business sentiment data offer a second perspective on UK economic momentum. The manufacturing purchasing managers’ index dropped to 51.9 in July from 52.5 in June. While this was a four-month low, it still signified expansion, as it remained above the 50 threshold. Additionally, a preliminary composite index rose to 52.1 from 49.3 in June, combining manufacturing and services, suggesting renewed growth in the private sector at the start of July.
Business investment and employment demand slow down
During the first quarter, business investment increased by 0.9%, following a 3% decline in the previous three months. Nevertheless, it was 1.3% below the level from the same period last year. EY’s new forecast predicts a 0.7% decrease in business investment for 2026, compared to its earlier projection of no change. The firm now expects growth of 1.8% in 2027 and 2.6% in 2028, both below previous estimates.
Demand for labor also showed signs of weakening in the latest official survey. The number of vacancies in the UK declined by 7,000 to 712,000 during April through June, a quarterly drop of 0.9%. Reductions were seen across 10 out of 18 industries, although the overall change remained within the survey’s confidence interval. Meanwhile, regular pay increased by 3.4% annually from March through May. Data indicate positive output levels, but inflation remains above target, with softer hiring activity and business investment remaining below last year’s figures.