UK Economic Growth Slows as Iran War Surges Energy Prices

UK economic growth slowed to 0.4% in the second quarter as disruptions from the Iran war began taking a toll, according to official figures released by the Office for National Statistics (ONS). While the expansion in the three months to June dropped from 0.6% in the first quarter, the data met City economists’ expectations and suggested stronger-than-feared resilience in the face of ongoing Middle East conflict.

Services and Construction Drive Second-Quarter Expansion

According to the ONS, services output expanded by 0.5% across the second quarter, while construction grew by 0.3%. Industrial production—which includes both manufacturing and energy—remained flat during the same period. Within the services sector, information and communication businesses posted the strongest growth at 2.7%, led largely by an upturn in computer programming.

For the single month of June, GDP growth outperformed forecasts by registering a 0.3% increase, whereas City economists had anticipated no growth. According to analysis of the monthly figures, households spent more than anticipated as hotter weather prompted consumers to ramp up spending. Additionally, the World Cup kept June GDP on an upward trajectory, lifting retail, hospitality, and advertising revenues on the month.

Cost Pressures and Business Sentiment

Despite the positive quarterly figures, analysts warn that momentum is cooling. Yael Selfin, the chief economist at KPMG, stated that consumers have weathered a series of shocks remarkably well since the start of the year. However, she warned that the second half of the year is likely to be weaker, noting that momentum will likely fade over the coming months as the UK economy closes out a strong first half.

Global headwinds continue to weigh on long-term growth. Stuart Morrison, research manager at the British Chambers of Commerce, said that while the UK economy showed welcome resilience in the second quarter, headline figures shouldn’t disguise the cocktail of cost pressures choking long-term business growth.

Following Donald Trump’s military strikes against Iran late in February, oil and gas costs experienced a sharp surge. Although consumer utility bills were protected until July by the energy price cap, that cap subsequently jumped by 13%. Economists expect rising energy costs to dampen growth through the remainder of 2026, putting pressure on chancellor John Healey as he prepares to present his first budget on 28 October.

Political Response and Inflation Outlook

With prices remaining high, chancellor John Healey could come under pressure to offer additional support to households and businesses this winter. Addressing these worries, Healey noted that the public is anxious about how Middle East tensions affect everyday living costs—which have remained excessively high for too long and placed extra strain on British enterprises. He described the administration as an active, hands-on government putting British interests first.

Political figures have also weighed in on potential relief measures. Having unveiled an electricity bill VAT reduction last month, Andy Burnham shared with the BBC on Wednesday a desire to push further, conceding that current steps fall short. Meanwhile, inflation figures for July are scheduled for publication next week and are expected to show a higher reading than June’s 2.6% rate, reflecting the jump in utility bills. Sustained high inflation will likely increase pressure on the Bank of England to raise interest rates.

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