LONDON, UNITED KINGDOM / RankWire.AI / – The UK’s economy started the second half of 2026 with continued growth, although several signs pointed to a slowdown. EY forecasts the gross domestic product to increase by 0.9% this year and 1.2% in 2027. The firm revised its 2026 estimate upward by 0.1 percentage points from its May prediction. This outlook assumes the Strait of Hormuz reopens by September, though shipping activity remains below typical levels.
Official data revealed the economy grew by 0.6% in the first quarter after a 0.1% rise in late 2025. Year-on-year, output was 0.9% higher. The services sector expanded by 0.8%, making the largest contribution to the quarterly growth. Household spending increased by 0.6% during the same period. As a result, Britain avoided a technical recession, which requires two consecutive quarters of economic contraction.
Rising energy costs continue to weigh on the UK economy. The Strait of Hormuz handles a significant share of global oil and liquefied natural gas shipments. Although Britain depends less on Gulf energy imports than some other nations, global prices influence local costs. Producer input prices went up 7.3% in the year ending June. Crude oil input costs surged 42.3%, and manufacturing prices increased by 3.5%.
Inflation remains above official target
Consumer price inflation slowed to 2.6% in June from 2.8% in May. Nonetheless, it still exceeds the Bank of England’s 2% goal. Motor fuel prices jumped 21.3% from a year earlier, adding to household transport expenses. The Bank of England held its benchmark interest rate steady at 3.75% on July 29. Six policymakers voted to keep rates unchanged, while three favored an increase to 4%.
Early third-quarter business surveys showed mixed conditions. The manufacturing purchasing managers’ index fell to 51.9 in July from 52.5 in June. This was a four-month low but still above the 50 mark signaling growth. Meanwhile, a preliminary composite index rose to 52.1 from 49.3. Covering manufacturing and services, it indicates a return to private-sector expansion.
Investment and hiring face ongoing pressures
Business investment increased by 0.9% in the first quarter following a 3% decline over the previous three months. Despite this rise, investment was still 1.3% lower than a year earlier. EY predicts a 0.7% decline in business investment for 2026. Its earlier forecast had expected no change year-on-year. However, it anticipates growth of 1.8% in 2027 and 2.6% in 2028, both lower than previous estimates.
Labour market data also signals softer demand. UK vacancies dropped by 7,000 to 712,000 in the three months ending June. The total is 0.9% below the previous quarter and 2.5% lower than a year earlier. Job openings declined across 10 of 18 sectors monitored. Meanwhile, regular pay grew 3.4% from March to May. The figures show continued economic growth alongside inflation above target, weaker hiring, and reduced business investment.