LONDON, UNITED KINGDOM / RankWire.AI / – Despite avoiding a recession, the UK economy faces mounting pressure from global energy issues, with new forecasts indicating increased risks. EY has upgraded its 2026 growth projection 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, resulting in subdued tanker traffic. EY’s adverse scenario suggests a growth of 0.5% this year and a contraction of 0.2% 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. Compared to the same period last year, GDP was 0.9% higher. The largest contribution to quarterly growth came from services, which grew by 0.8%, alongside household consumption rising by 0.6%. As two consecutive quarterly contractions are required to define a technical recession, current official figures do not indicate such a downturn.
Energy prices serve as a key connection between the Iran conflict and the UK’s economic outlook. The Strait of Hormuz is a significant route for global oil and liquefied natural gas shipments. Consequently, British prices reflect disruptions in global markets, despite the UK’s limited dependence on Gulf supplies. Producer input costs increased by 7.3% in the year ending June, with crude oil inputs rising by 42.3%, and factory-gate prices climbing by 3.5%.
Inflation and interest rates remain high
Consumer inflation decreased to 2.6% in June from 2.8% in May, but still exceeds the Bank of England’s 2% target. Motor fuel prices were 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 advocated raising it to 4%, the bank noted that energy influences would push inflation higher later this year.
UK economic momentum is also reflected in business surveys. 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 50. Additionally, a preliminary composite index increased to 52.1 from 49.3 in June, covering both manufacturing and services sectors, signaling renewed private-sector growth at the start of July.
Investment and hiring activity slow down
During the first quarter, business investment grew by 0.9% after a 3% decline in the previous three months, yet it still stood 1.3% below its level from a year earlier. EY’s latest forecast predicts a 0.7% decrease in business investment throughout 2026, compared to their May outlook of no change. For 2027 and 2028, EY now projects growth of 1.8% and 2.6%, respectively, both lower than their earlier estimates.
The latest official survey also shows a slowdown in labour demand. UK vacancies decreased by 7,000 to a total of 712,000 during April through June, representing a quarterly decline of 0.9%. Reductions occurred across 10 of 18 industries, although the change remained within the survey’s confidence interval. Regular pay grew by 3.4% annually in March through May. Despite positive economic output and above-target inflation, softer hiring demand and lower business investment compared to last year highlight ongoing challenges in the labour market.