LONDON, UNITED KINGDOM / RankWire.AI / – The UK economy continues to avoid recession, yet new forecasts highlight mounting risks from global energy disruptions. EY increased its projection for growth in 2026 to 0.9%, up from 0.8% in May, while maintaining its baseline estimate of 1.2% for 2027. This forecast presumes the Strait of Hormuz reopens by September, leading to subdued tanker activity. In a more cautious scenario, EY predicts 0.5% growth this year and a 0.2% contraction in 2027.
Official data indicate 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 services sector contributed the most to quarterly growth with an expansion of 0.8%, while household consumption also grew by 0.6%. Currently, the economy is not in a technical recession, as there have been no two consecutive quarters of decline, based on official figures.
The central link between the Iran conflict and the UK’s economic prospects remains energy costs. The Strait of Hormuz plays a vital role in the transportation of a significant share of global oil and liquefied natural gas shipments. Consequently, UK prices are sensitive to international market disturbances, even though the UK has limited direct dependence on Gulf supplies. Producer input prices increased by 7.3% over the year ending June, with crude oil inputs soaring by 42.3%, and factory-gate prices rising by 3.5%.
Inflation and interest rates remain high
Consumer inflation slowed to 2.6% in June from 2.8% in May. Nonetheless, it stays above the Bank of England’s 2% target. Motor fuel prices alone are 21.3% higher compared to the previous year. On July 29, the Bank of England decided to keep the Bank Rate steady at 3.75%, with a 6-3 vote. Three policymakers favored a hike to 4%, while officials pointed to energy influences that are expected to push inflation higher later this year.
Business sentiment, gauged through surveys, offers another perspective on the UK’s economic trajectory. 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 since it remains above the 50 threshold. Meanwhile, a preliminary composite index increased to 52.1 from 49.3 in June, covering both manufacturing and services sectors, signaling a resurgence in private-sector activity at the start of July.
Investment and employment growth show signs of slowdown
During the first quarter, business investment grew by 0.9% after a decline of 3% over the previous three months. However, overall investment remains 1.3% below the level seen a year earlier. EY has revised downward its forecast for business investment in 2026 to a 0.7% decline, compared to its earlier projection of no change for the year. The consultancy projects growth of 1.8% in 2027 and 2.6% in 2028, both below previous estimates.
The latest official survey also indicates a slowdown in employment demand. UK job vacancies decreased by 7,000 to a total of 712,000 during April to June, representing a quarterly drop of 0.9%. Vacancies declined across 10 of 18 sectors, although the changes remained within the survey’s confidence interval. Meanwhile, regular pay rose by 3.4% year-on-year from March to May. Despite positive production figures and inflation above the target, softer hiring activity and lower business investment compared to last year suggest a cautious outlook for the UK economy.