The UK economy expanded by 0.4 percent between April and June 2026, according to official data from the Office for National Statistics (ONS), signaling that businesses and consumers have so far withstood the most severe economic disruptions stemming from the war in Iran.

The second-quarter growth figure matched analysts' expectations and was accompanied by an unexpected 0.3 percent expansion in June, surpassing forecasts. Meanwhile, May's figures were revised downward from 0.1 percent growth to zero growth.

City economists surveyed by Bloomberg had projected second-quarter growth of 0.4 percent and anticipated that June data would show a 0.1 percent contraction in total output value.

Sector Performance

The services sector was the primary driver of UK economic growth during the three-month period, expanding by 0.5 percent. Production output remained flat with no change from the first quarter, while the construction sector posted a modest expansion of 0.3 percent, struggling to gain traction.

The data suggests that businesses and consumers have demonstrated resilience against price shocks triggered by the war in Iran, which has driven up oil prices and poses a continuing inflationary risk for the remainder of the year. However, analysts cautioned that the economy benefited from one-off factors including the World Cup and a series of heatwaves.

George Brown, senior economist at Schroders, acknowledged that the UK economy had proven "resilient," but noted that he suspected "seasonal quirks are flattering activity in the first half of the year, with growth likely to lose some steam later in 2026."

Yael Selfin, chief economist at KPMG, said "temporary tailwinds are likely to fade, and higher prices continue to squeeze households' purchasing power."

"Growth is expected to moderate in the coming months as the impact of higher prices and borrowing costs filter through to households and businesses," Selfin added. She noted that the growth figures indicated consumers had benefited from warm weather and coped with recent economic shocks "remarkably well." The ONS indicated that "sporting events," widely interpreted as a reference to the World Cup, contributed to increased spending.

Liz McKeown, director of economic statistics at the ONS, said: "Growth slowed in the second quarter of the year, following a strong start to 2026, but remained relatively robust."

Second-quarter growth was slower than the 0.6 percent GDP increase recorded in the first three months of 2026. The UK's reliance on imported energy leaves it particularly exposed to oil and gas price spikes, meaning that any prolonged disruption to Gulf shipping routes would feed through directly into domestic inflation, household energy bills, and business costs — amplifying the squeeze on real incomes that Selfin and others have flagged.

Fiscal and Geopolitical Risks

The deceleration in output and economic activity places pressure on Prime Minister Andy Burnham and Chancellor John Healey ahead of what is expected to be a challenging Budget.

Senior ministers were warned that the UK economy's trajectory hinges significantly on President Trump's decisions and Iran's actions across the Middle East, particularly regarding the reopening of the Strait of Hormuz, through which roughly a fifth of global oil and liquefied natural gas supplies normally pass.

According to Bloomberg, Treasury officials warned top ministers that the UK economy would grow by just 0.3 percent if the strait remained blocked for the remainder of the year. The Bank of England has also indicated it would raise interest rates under such a scenario — a move that would increase borrowing costs for mortgage holders and businesses, potentially dampening the consumer spending that has underpinned recent growth.

Independent forecasters have outlined similarly stark projections. Economists at EY warned that the UK economy could slip into recession if oil and gas supplies fail to transit through the Gulf region, which accounts for approximately one-fifth of global energy supplies.

Recent data indicates that government spending has been a significant contributor to economic growth, a pattern that some economists view with caution because it implies growth has relied partly on public expenditure rather than sustained private-sector momentum.

Healey faces mounting pressure from industry leaders to deliver a confidence-boosting Budget against an increasingly gloomy economic backdrop. Devolution is expected to feature prominently in the Budget, with the Chancellor previously endorsing regional-led investment bodies as engines of growth.

However, economists at Capital Economics have cautioned that reduced fiscal headroom combined with spending commitments on energy policy support and defence could compel the Chancellor to raise approximately £25 billion in taxes.

Political Reactions

Responding to the latest growth figures, Chancellor John Healey said: "I know people are worried about the impact of the conflict in the Middle East on their cost of living, which has been too high for too long and it has added pressure on British businesses."

"This is an active, hands-on government, putting British interests first – giving breathing space to those feeling the strain, making our country more resilient and bringing hope back," Healey said. "We've seen the fastest growth in the G7 this year, but we now need to double down and drive growth in every postcode."

Shadow Chancellor Sir Mel Stride offered a sharply different assessment: "Our economy is struggling because Labour have no plan for growth."

"Labour have mismanaged the economy with their tax and borrowing spree, leaving it weak and vulnerable to the effects of shocks like the Iran War," Stride said. "Yet Andy Burnham is gearing up to tax and borrow even more, doubling down on those failures."

Source: City AM