LONDON, UNITED KINGDOM / RankWire.AI / – The UK economy continued its expansion into the second half of 2026, though several indicators pointed to softer momentum. EY forecasts a gross domestic product increase of 0.9% for this year and 1.2% for 2027. The consultancy revised its 2026 outlook upward by 0.1 percentage point from its May projection. This central forecast assumes the Strait of Hormuz reopens by September, but shipping activity remains below typical levels.
Recent official data indicated a 0.6% growth in the economy during the first quarter, following a 0.1% rise in late 2025. Overall output was 0.9% higher than a year prior. The services sector contributed most significantly, rising by 0.8%, which helped drive the quarterly increase. Household consumption also increased by 0.6% over the same period. As a result, Britain avoided entering a technical recession, which requires two consecutive quarters of declining economic output.
Rising energy costs have exerted additional pressure across the UK economy. The Strait of Hormuz is a key route for a substantial share of global oil and liquefied natural gas shipments. While the UK depends less on direct Gulf energy imports compared to some nations, global price shifts 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 the target level
Consumer price inflation decreased to 2.6% in June from 2.8% in May. However, it still exceeds the Bank of England’s 2% goal. Motor fuel prices climbed 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. Six policymakers favored holding rates steady, while three supported an increase to 4%.
Business surveys at the start of the third quarter painted a mixed picture. The manufacturing purchasing managers’ index declined to 51.9 in July from 52.5 in June, marking a four-month low but still above the 50 threshold that indicates growth. Meanwhile, a preliminary composite index rose to 52.1 from 49.3, reflecting a return to expansion in the private sector, encompassing both manufacturing and services.
Investment and hiring pressures persist
Business investment increased by 0.9% in the first quarter after a 3% decline over the previous three months. Despite this growth, overall investment remained 1.3% below the same period last year. EY projects a 0.7% decline in business investment for 2026, down from its earlier forecast of no change. Growth is expected to pick up to 1.8% in 2027 and 2.6% in 2028, although both figures are lower than previous estimates.
Labor market data also revealed a softening in employer demand. UK vacancies fell by 7,000 to 712,000 during the three months ending in June. The total decreased by 0.9% from the previous quarter and 2.5% from a year earlier. Job openings declined across 10 of the 18 sectors monitored. Meanwhile, regular pay increased by 3.4% between March and May. The figures suggest ongoing economic growth alongside inflation above target, weaker hiring activity, and reduced annual business investment.