LONDON, UNITED KINGDOM / RankWire.AI / – The UK economy continues to avoid recession, yet new forecasts indicate mounting pressure from global energy supply disruptions. EY has upgraded its 2026 growth projection to 0.9%, up from 0.8% in May, while maintaining its 2027 outlook at 1.2%. This optimistic forecast presumes the Strait of Hormuz will reopen by September, resulting in reduced tanker traffic. In contrast, EY’s adverse scenario anticipates a growth rate of 0.5% this year and a slight 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. The GDP level is now 0.9% higher than the same period last year. The services sector contributed most significantly to quarterly growth with an expansion of 0.8%, while household consumption also saw a 0.6% rise. The current official figures do not indicate a technical recession, which requires two consecutive quarterly declines.
Energy prices are at the core of the connection between the Iran conflict and the UK’s economic outlook. The Strait of Hormuz accounts for a substantial share of global oil and liquefied natural gas shipments. Consequently, UK prices are affected by disruptions in international markets, despite the country’s limited direct dependence on Gulf supplies. Producer input prices 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 stay high
Consumer inflation decreased to 2.6% in June from 2.8% in May, although it remains above the Bank of England’s 2% target. Motor fuel prices are up 21.3% compared to the previous year. On July 29, the Bank of England maintained the Bank Rate at 3.75%, with a 6-3 vote. While three policymakers favored a rise to 4%, the bank noted that energy-related factors would likely push inflation higher later in the year.
Business sentiment, as measured by surveys, offers another perspective on the UK’s economic trajectory. The manufacturing purchasing managers’ index dropped to 51.9 in July from 52.5 in June, marking a four-month low but still indicating expansion. Meanwhile, a preliminary composite index increased to 52.1 from 49.3 in June, reflecting renewed growth in both manufacturing and services sectors at the start of July.
Investment and employment growth slow
During the first quarter, business investment grew by 0.9%, following a 3% decline in the previous three months. However, investment levels remain 1.3% below the same period last year. EY now projects a 0.7% decrease in business investment for 2026, revising its May forecast of no change. The firm anticipates growth of 1.8% in 2027 and 2.6% in 2028, though these figures are lower than earlier estimates.
The latest official survey also indicates a slowdown in labor demand. UK vacancies dropped by 7,000 to 712,000 during April through June, representing a quarterly decline of 0.9%. Job openings decreased across 10 of 18 sectors, though the variation remains within the survey’s confidence interval. Meanwhile, regular pay grew by 3.4% annually between March and May. Current data show positive economic output, but with inflation above target, softer hiring demand, and business investment below last year’s level.