LONDON, UNITED KINGDOM / RankWire.AI / – Despite avoiding a recession, the UK economy faces mounting pressures from global energy disruptions, with new forecasts reflecting this challenge. EY has increased its 2026 growth projection to 0.9%, up from 0.8% in May, while maintaining its 2027 estimate at 1.2%. This forecast presumes the Strait of Hormuz reopens by September with limited tanker activity. EY’s pessimistic scenario anticipates 0.5% growth this year and a 0.2% decline in 2027.
Official data indicate that gross domestic product expanded by 0.6% in the first quarter, following a 0.1% rise at the end of 2025, and was 0.9% higher than the previous year. Services grew by 0.8%, contributing most to quarterly growth, while household expenditure also rose by 0.6%. Current official figures do not show two consecutive quarterly contractions, meaning the UK has not entered a technical recession.
Energy prices are central to the link between the Iran conflict and the UK’s economic outlook, as the Strait of Hormuz accounts for a significant share of global oil and liquefied natural gas shipments. Consequently, UK prices mirror disruptions in international markets despite limited direct dependence on Gulf supplies. Producer input costs increased by 7.3% over the year to June, with crude oil inputs rising by 42.3%, and factory-gate prices climbing 3.5%.
Inflation and Interest Rates Remain Elevated
In June, consumer inflation decreased to 2.6% from 2.8% in May, yet it stayed above the Bank of England’s 2% target. Motor fuel prices 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 a rise to 4%, citing energy effects that are expected to push inflation higher later this year.
Secondhand measures of UK economic activity, such as business surveys, also suggest a slowdown. The manufacturing purchasing managers’ index dropped to 51.9 in July from 52.5 in June, marking a four-month low but still above the 50-point mark indicating expansion. Meanwhile, a preliminary composite index increased to 52.1 from 49.3 in June, encompassing both manufacturing and services, signaling renewed growth at the beginning of July.
Business Investment and Employment Slow Down
Business investment grew by 0.9% in the first quarter after a 3% decline in the previous three months, although it remained 1.3% below its level from the same period last year. EY now expects a 0.7% decrease in business investment for 2026, revising down from its May forecast of no change. For 2027 and 2028, EY predicts growth of 1.8% and 2.6%, respectively, figures that are lower than earlier estimates.
The latest official survey also shows a weakening in labor demand, with UK vacancies decreasing by 7,000 to 712,000 during April through June, a quarterly fall of 0.9%. Although vacancies declined across 10 of 18 industries, the change was within the survey’s confidence interval. Meanwhile, regular pay grew by 3.4% annually from March to May. The current data indicate positive output alongside inflation exceeding targets, softer hiring demand, and business investment below last year’s levels.