LONDON, UNITED KINGDOM / RankWire.AI / – While the UK economy remains outside a recession, recent subdued investment and hiring trends have prompted closer examination of its future growth prospects. EY predicts that gross domestic product will grow by 0.9% in 2026, revising its May forecast upward by 0.1 percentage points. The firm projects 1.2% expansion in 2027. Its central scenario assumes the Strait of Hormuz reopens by September, although shipping activity remains below typical levels. The impact of energy costs has now become a focal point in the UK’s economic discussions.
Official data indicate that GDP expanded by 0.6% in the first quarter, following a 0.1% increase in late 2025. Economic output was 0.9% higher than the same period last year. The services sector contributed most to quarterly growth with an increase of 0.8%, and household consumption also grew by 0.6%. To classify as a technical recession, two consecutive quarterly contractions are necessary, but the latest complete data do not meet this criterion.
The Strait of Hormuz accounts for a significant share of global oil and liquefied natural gas shipments. Although the UK has limited direct reliance on Gulf energy supplies, fluctuations in global prices influence domestic fuel and manufacturing costs. Producer input prices rose by 7.3% in the year ending in June, with crude oil input costs jumping 42.3% over the same period. Factory-gate prices increased by 3.5%, indicating that rising costs are already affecting manufacturers before goods reach retail outlets.
Inflationary pressures continue to influence interest rate decisions
In June, consumer price inflation slowed to 2.6% from 2.8% in May. Nonetheless, this rate remains above the Bank of England’s 2% target. Motor fuel prices are 21.3% higher than they were a year earlier. The Bank of England maintained the Bank Rate at 3.75% on July 29 following a 6-3 vote, with three policymakers supporting an increase to 4%. The division among policymakers underscores ongoing concerns about inflation, despite the economy showing modest growth.
Activity in the business sector at the start of the third quarter presents a mixed picture. The manufacturing purchasing managers’ index dropped to 51.9 in July from 52.5 in June, reaching a four-month low, although it still signals expansion since it remains above the 50 mark. Meanwhile, a preliminary composite index increased to 52.1 from 49.3 in June. This broader measure, which combines manufacturing and services, points to renewed growth in the private sector.
Investment and hiring levels stay subdued
Business investment rose by 0.9% in the first quarter following a 3% decline in the previous three months. Despite this quarterly increase, investment remains 1.3% below its level from one year earlier. EY forecasts a 0.7% decline in business investment for 2026, down from their earlier projection of no change. For 2027, EY now anticipates a 1.8% rise, followed by a 2.6% increase in 2028, both figures lower than previously estimated.
During the three months from April through June, UK job vacancies decreased by 7,000 to a total of 712,000. This represents a quarterly drop of 0.9% and an annual decline of 2.5%. Job openings fell across 10 of the 18 sectors tracked, though the quarterly change remains within the survey’s confidence interval. Meanwhile, regular pay increased by 3.4% from March to May. Current data reveal positive output levels amid inflation that exceeds targets, with recruitment and business investment both weaker compared to last year’s figures.