LONDON, UNITED KINGDOM / RankWire.AI / – The UK’s economy continued its expansion into early 2026, despite sustained inflationary pressures, investment challenges, and hiring trends. According to EY, the country’s gross domestic product is projected to grow by 0.9% this year and by 1.2% in 2027. The firm revised its 2026 forecast upward by 0.1 percentage point from its May estimate. This outlook assumes that the Strait of Hormuz reopens by September, though shipping volumes are expected to remain below normal levels under this scenario.
Official figures indicated a 0.6% growth in the UK economy during the first quarter, following a 0.1% increase in the last quarter of 2025. Compared to the same period last year, output has increased by 0.9%. The services sector contributed significantly, expanding by 0.8% and driving most of the quarterly growth. During the same timeframe, household expenditure rose by 0.6%. These figures do not qualify as a technical recession, which requires two consecutive quarterly declines.
Energy markets continue to exert considerable pressure on UK prices and production costs. The Strait of Hormuz is responsible for a large share of global oil and liquefied natural gas shipments. Although Britain imports a limited amount of energy directly from Gulf suppliers, international price fluctuations heavily influence domestic fuel expenses. Producer input prices increased by 7.3% in the year ending June. Crude oil input costs surged by 42.3%, while factory-gate prices rose by 3.5%.
Inflation Maintains Focus on Monetary Policy
The annual inflation rate eased slightly to 2.6% in June from 2.8% in May. Despite this moderation, it remains above the Bank of England’s 2% target. Motor fuel prices saw a significant increase of 21.3% year-over-year. On July 29, the Bank of England maintained its benchmark rate at 3.75%. The voting was split, with 6-3 members favoring no change, while three supported a rate increase to 4%. This division underscores ongoing concerns about inflationary pressures.
Early third-quarter business surveys provided mixed signals. The manufacturing purchasing managers’ index declined to 51.9 in July from 52.5 in June, marking a four-month low yet remaining above the 50 threshold that indicates expansion. Meanwhile, a preliminary composite index increased to 52.1 from 49.3, reflecting growth across manufacturing and services sectors and signaling renewed private-sector expansion in July.
Weak Investment and Labour Market Conditions Persist
Business investment saw a modest rise of 0.9% in the first quarter, following a 3% decline in the previous three months. Nonetheless, it was still 1.3% below the level recorded a year earlier. EY’s forecasts indicate a 0.7% decline in business investment for 2026, contrasting with their earlier projection of no change annually. The firm anticipates growth of 1.8% in 2027 and 2.6% in 2028, though both remain below previous estimates.
During the three months ending in June, the UK experienced 712,000 job vacancies, representing a decrease of 7,000 from the prior quarter and a 2.5% drop compared to a year ago. Reductions in vacancies were observed across 10 out of 18 industries measured, although the overall change stayed within the survey’s confidence interval. Meanwhile, regular pay increased by 3.4% from March through May. The latest data highlights ongoing economic growth amidst inflation that exceeds targets, subdued hiring, and lower annual business investment.