LONDON, UNITED KINGDOM / RankWire.AI / – Britain’s economy maintained its growth trajectory into early 2026, yet persistent inflation, investment setbacks, and hiring challenges continue to exert pressure. According to EY, the UK’s gross domestic product is projected to grow by 0.9% in 2026 and 1.2% in 2027. The firm increased its 2026 forecast by 0.1 percentage point compared to its May estimate. This central projection assumes the Strait of Hormuz reopens by September, though shipping volumes are expected to stay below normal levels under this scenario.
Official statistics revealed a 0.6% expansion of the UK economy in the first quarter, following a 0.1% increase in the final quarter of 2025. Year-over-year, output is up 0.9%. The growth was mainly driven by an 0.8% rise in the services sector, which accounted for most of the quarterly increase. Household expenditure also grew by 0.6% during this period. These figures do not qualify as a technical recession, as that would require two consecutive quarterly contractions.
Energy markets continue to be a significant factor in inflation and production costs. The Strait of Hormuz handles a substantial share of global oil and liquefied natural gas shipments. Although the UK imports limited energy directly from Gulf suppliers, international price trends influence domestic fuel costs. Producer input prices surged by 7.3% over the year ending in June, with crude oil input costs jumping by 42.3%, and factory-gate prices increasing by 3.5%.
Inflation Remains a Central Focus of Monetary Policy
In June, annual consumer price inflation decreased slightly to 2.6% from 2.8% in May. Despite this easing, the rate stays above the Bank of England’s 2% target. Motor fuel prices rose by 21.3% compared to the previous year. The Bank of England kept its benchmark rate steady at 3.75% on July 29. The decision was supported by a 6-3 vote for no change, while three members favored a hike to 4%. This vote underscores ongoing concerns regarding inflationary pressures.
Business surveys presented mixed signals as the third quarter began. The manufacturing purchasing managers’ index (PMI) declined to 51.9 in July from 52.5 in June, marking a four-month low. Nonetheless, the index stayed above the 50 threshold indicating expansion. Meanwhile, a preliminary composite index increased to 52.1 from 49.3, reflecting growth across manufacturing and services sectors during July and signaling a recovery in private-sector activity.
Weak Investment and Labour Market Demand Persist
Business investment grew by 0.9% in the first quarter, following a 3% decline over the previous three months. Despite this, investment remains 1.3% below its year-earlier level. EY now predicts a 0.7% decrease in business investment for 2026, a revision from its earlier forecast of no change. Looking ahead, the firm expects growth of 1.8% in 2027 and 2.6% in 2028, both below previous projections.
During the three months ending in June, the UK had 712,000 job vacancies, a decrease of 7,000 from the previous quarter and down 2.5% year-over-year. Reductions in vacancies occurred across 10 of the 18 industries surveyed, but the quarterly change remained within the survey’s confidence interval. Meanwhile, regular pay rose by 3.4% from March through May. These data point to continued economic growth amid inflation above target levels, weaker hiring activity, and subdued business investment growth.