LONDON, UNITED KINGDOM / RankWire.AI / – The UK’s economy continued to grow into the second half of 2026, although several indicators pointed to diminishing momentum. EY forecasts that gross domestic product will increase by 0.9% in 2026 and by 1.2% in 2027. The consultancy raised its 2026 growth projection by 0.1 percentage points from its estimate in May. Its central outlook assumes the Strait of Hormuz will reopen by September, though shipping activity is still below typical levels.
Official data revealed that the economy expanded by 0.6% in the first quarter, following a 0.1% increase in late 2025. Compared to the same period last year, output was 0.9% higher. The services sector grew by 0.8%, contributing most significantly to the quarterly growth. Household consumption also increased by 0.6% during this period. As a result, Britain avoided a technical recession, which is defined by two consecutive quarters of declining economic output.
Rising energy costs have exerted additional pressure across the UK economy. The Strait of Hormuz accounts for a substantial share of the global oil and liquefied natural gas shipments. While Britain depends less directly on Gulf energy imports than some other countries, global prices continue to influence local costs. Producer input prices rose by 7.3% in the year ending June. Crude oil input costs surged by 42.3%, and manufacturers’ prices increased by 3.5%.
Inflation Remains Above Official Target
Consumer price inflation decreased to 2.6% in June from 2.8% in May. Nevertheless, this rate still surpasses the Bank of England’s 2% target. The cost of motor fuels increased by 21.3% compared to the previous year, adding to household transport expenses. The Bank of England maintained its benchmark interest rate at 3.75% on July 29. Out of six policymakers, three supported holding rates steady, while three others favored raising it to 4%.
Business sentiment surveys indicated mixed conditions as the third quarter began. 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 threshold that signals growth. Meanwhile, a preliminary composite index rose from 49.3 to 52.1, reflecting a broader expansion in the private sector that includes both manufacturing and services.
Investment and Hiring Challenges Persist
Business investment grew by 0.9% in the first quarter after a 3% decline in the previous three months. Despite this positive change, investment levels remained 1.3% below those of the same period last year. EY projects a 0.7% decrease in business investment over 2026, a shift from its earlier forecast of no annual change. The firm anticipates growth of 1.8% in 2027 and 2.6% in 2028, both figures lower than previously estimated.
Meanwhile, labour market data indicated a slowdown in employer demand. UK vacancies decreased by 7,000 to 712,000 in the three months through June. This decline of 0.9% from the previous quarter and 2.5% from a year earlier was observed across 10 of the 18 industries surveyed. Regular pay increased by 3.4% from March to May. The figures depict an economy that continues to expand but faces challenges like inflation above the target, subdued hiring, and reduced business investment growth.