UK economic growth slows down as Iran war pushes up energy prices

Economic growth slowed in the second quarter of the year, as the disruption unleashed by the Iran war began to take its toll, official figures show.

The Office for National Statistics (ONS) said GDP expanded by 0.4% in the three months to June, down from 0.6% in the first quarter, in line with City economists’ expectations.

While it marked a slowdown, analysts said the data suggested the UK economy had been more resilient in the face of the ongoing Middle East conflict than feared.

Yael Selfin, the chief economist at KPMG, said: “Consumers have faced a series of shocks since the start of the year but have weathered them remarkably well.”

However, she warned the second half of the year was likely to be weaker. “The UK economy closed out the first half of the year on strong footing, but momentum is likely to fade over the coming months,” she said.

The news comes as the new chancellor, John Healey, prepares to present his first budget on 28 October.

The ONS said services output expanded by 0.5% across the second quarter, and construction by 0.3%, while industrial production – which includes manufacturing and energy – was flat.

Within the important services sector, the strongest growth was in information and communication businesses, which was up 2.7%, led by an upturn in computer programming.

GDP growth in the single month of June was a better-than-expected 0.3% – City economists had forecast no growth.

Sanjay Raja, the chief UK economist at Deutsche Bank, said warm weather and World Cup-related spending may have helped to buoy demand.

“In short, households spent more than anticipated,” he said. “Hotter weather saw consumers ramp up spending. The World Cup may have also had an effect in keeping June GDP on an upward trajectory with retail, hospitality, and advertising revenues all up on the month.”

However, economists still expect rising energy costs to dampen growth through the remainder of 2026.

Oil and gas prices shot up in the wake of Donald Trump’s attacks on Iran at the end of February – though consumer utility bills were protected until July by the energy price cap, which then jumped by 13%.

With prices remaining high, Healey could come under pressure to offer additional support to households and businesses this winter.

Andy Burnham announced a VAT cut for electricity bills last month, but told the BBC on Wednesday that he would like to go further. “I can accept criticism that this isn’t enough, because I wouldn’t say it’s enough,” he said.

The British Chambers of Commerce responded to the GDP data by sounding the alarm about continued high business costs.

Stuart Morrison, its research manager, said: “Faced with global headwinds from the Iran conflict, the UK economy showed welcome resilience in Q2. But the headline figures shouldn’t disguise the cocktail of cost pressures choking long-term business growth.”

Inflation figures for July will be published next week and are expected to show a higher reading than June’s 2.6%, reflecting rising utility bills. Sustained high inflation will increase pressure on the Bank of England to raise interest rates.

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.”