The UK economy is showing signs of a genuine rebound, but the fallout from the Iran war and surging energy prices threaten to derail the momentum heading into the second half of 2026.
Official data published Thursday showed the UK economy grew by 0.4% in the second quarter, following a 0.6% expansion in the first quarter of the year.
Business investment rose by 1.7% in the same period, defying a Reuters poll of economists that had forecast a 0.5% decline, offering an encouraging sign of private sector confidence.
Sanjay Raja, Deutsche Bank’s chief UK economist, said the figures kept the country on track to record the strongest growth of any G7 nation for a second consecutive quarter.
Raja said the latest data brought the annualised growth rate across the first half of the year to a “scorching” 2%, a figure that will be welcomed by policymakers in Westminster.
Consumer spending has been stronger than expected in recent months, boosted by hot weather, a strong England performance at the FIFA World Cup, and a broader uptick in business confidence.
“Some slowdown remains likely,” Raja added, particularly as higher prices at the pump squeeze household incomes, though he noted that “for the first time in a while, we now see modest upside risks brewing.”
The improved performance keeps the UK at the top of the G7 growth table, but economists are warning that the picture is likely to deteriorate significantly in the months ahead.
Bloomberg reported Wednesday that Treasury officials had presented worst-case scenario modelling to Prime Minister Andy Burnham, with figures reportedly suggesting growth could slow to just 0.3% next year if disruption on the Strait of Hormuz persists.
The Treasury did not respond to a request for comment on the reported modelling, leaving questions open about the government’s contingency planning for a prolonged conflict.
In April, the International Monetary Fund warned that the US and Israel’s war with Iran would hit the UK’s growth prospects harder than any other wealthy country, citing its heavy reliance on oil and gas imports.
Tomasz Wieladek, chief European macro economist at T. Rowe Price, acknowledged encouraging signs that UK growth had shifted from government spending towards stronger private sector performance.
However, Wieladek cautioned that the notion the Middle East conflict had left the British economy unscathed was “likely too good to be true,” with the second half expected to be considerably weaker.
“Normally, growth in the first two quarters is reported to be much stronger than in the second half of the year,” Wieladek said, underlining the risk of a sharper slowdown ahead.
Shaniel Ramjee, co-head of multi asset at Pictet Asset Management, pointed out that growth remained heavily concentrated in the UK’s dominant services industry rather than spreading across the broader economy.
“The hot weather has helped the services sector, but in fact, when we have a global infrastructure boom, our construction sector and our industrial production sector are down on the year,” Ramjee told CNBC.