LONDON, UNITED KINGDOM / RankWire.AI / – Although the UK economy continues to avoid a recession, new forecasts indicate mounting pressures from global energy market disruptions. EY has upgraded its 2026 growth prediction to 0.9% from 0.8% in May, while maintaining its 2027 estimate at 1.2%. This forecast presumes the Strait of Hormuz will reopen by September with reduced tanker traffic. EY’s downside scenario anticipates a 0.5% growth rate for this year and a 0.2% contraction in 2027.
Official data reveal that gross domestic product increased by 0.6% in the first quarter, after a 0.1% growth in late 2025. The GDP was 0.9% higher than its level a year earlier. The services sector grew by 0.8%, contributing the most to quarterly expansion. Household spending also rose by 0.6%. To qualify as a technical recession, the economy must experience two successive quarterly declines, a pattern not evident in the current official figures.
Energy prices serve as a key link between the Iran conflict and the UK’s economic outlook. The Strait of Hormuz handles a significant portion of global oil and liquefied natural gas shipments. Consequently, UK prices reflect international market disruptions, even though the country has limited direct dependence on Gulf supplies. Producer input costs increased by 7.3% year-over-year to June. Crude oil inputs surged by 42.3%, while factory-gate prices rose by 3.5%.
Inflation and interest rates remain high
Consumer inflation slowed to 2.6% in June from 2.8% in May. Despite this decline, inflation stayed above the Bank of England’s 2% target. Motor fuel prices increased by 21.3% compared to the previous year. On July 29, the Bank of England maintained its Bank Rate at 3.75%, with a 6-3 vote. Three policymakers favored raising it to 4%, while the bank noted that energy-related factors would push inflation higher later this year.
Indicators from business surveys offer additional insight into UK economic momentum. The manufacturing purchasing managers’ index dropped to 51.9 in July from 52.5 in June. While this was a four-month low, it still indicated expansion, as scores above 50 reflect growth. The preliminary composite index increased to 52.1 from 49.3 in June. This composite measure, covering both manufacturing and services, points to renewed private-sector expansion at the start of July.
Business investment and employment growth slow down
Business investment grew by 0.9% during the first quarter after a 3% decline in the previous three months. Nevertheless, it remains 1.3% below its level from a year earlier. EY’s latest forecast predicts a 0.7% decrease in business investment in 2026, a shift from its May projection of no change. The firm expects growth rates of 1.8% in 2027 and 2.6% in 2028, both below earlier estimates.
Demand for labor has also weakened based on recent official data. UK vacancies decreased by 7,000 to 712,000 during April through June, reflecting a quarterly drop of 0.9%. Job openings declined across 10 of 18 sectors, though the variation stayed within the survey’s confidence interval. Average pay increased by 3.4% annually between March and May. The latest data show positive output levels, but above-target inflation, softer hiring demand, and business investment below last year’s figures suggest a cautious economic outlook.