LONDON, UNITED KINGDOM / RankWire.AI / – Although the UK economy continues to avoid a recession, new forecasts indicate mounting pressure from global energy disruptions. EY has increased its projection for 2026 growth to 0.9%, up from 0.8% in May, while keeping its baseline estimate for 2027 steady at 1.2%. This forecast presumes the Strait of Hormuz reopens by September with limited tanker activity. EY’s downside scenario suggests 0.5% growth for this year and a 0.2% contraction 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, and stood 0.9% above its level from the same period last year. The services sector grew by 0.8%, making the largest contribution to quarterly growth, while household consumption also rose by 0.6%. Since a technical recession is defined as two consecutive quarterly contractions, the current official data do not indicate such a downturn.
The link between energy costs, the Iran conflict, and the UK’s economic outlook remains central, as the Strait of Hormuz transports a significant share of global oil and liquefied natural gas shipments. Consequently, UK prices reflect disruptions in international markets despite the country’s limited direct reliance on Gulf supplies. Producer input prices increased by 7.3% in the year to June, with crude oil inputs rising by 42.3%, and factory-gate prices going up by 3.5%.
Inflation and interest rates remain high
In June, consumer price inflation slowed to 2.6% from 2.8% in May, yet it still exceeds the Bank of England’s 2% target. Prices for motor fuels were 21.3% higher compared to the previous year. On July 29, the Bank of England maintained its Bank Rate at 3.75% following a 6-3 vote, with three policymakers supporting an increase to 4%, while the bank noted that energy-related effects would push inflation higher later this year.
Additional insight into UK economic momentum comes from business surveys. The manufacturing purchasing managers’ index declined to 51.9 in July from 52.5 in June, indicating a four-month low but still signaling expansion, as readings above 50 reflect growth. Meanwhile, a preliminary composite index rose to 52.1 from 49.3 in June, which encompasses both manufacturing and services sectors and points to renewed private-sector expansion at the start of July.
Business investment and employment growth slow
During the first quarter, business investment increased by 0.9% after a 3% decline in the preceding three months, but it remained 1.3% below the level recorded a year earlier. EY now predicts a 0.7% fall in business investment for 2026, revising its May outlook of no change. The firm also forecasts growth rates of 1.8% in 2027 and 2.6% in 2028, both below previous estimates.
Meanwhile, demand for labor appears to have softened according to the latest official survey. UK vacancies decreased by 7,000 to a total of 712,000 during April through June, representing a quarterly decline of 0.9%. This decline was observed across 10 of 18 industries, although the changes remained within the survey’s confidence interval. Regular pay rose by 3.4% annually from March through May, with current data pointing to positive output alongside inflation surpassing target levels, weaker hiring activity, and business investment below last year’s figures.