The United Kingdom’s economy has been outperforming expectations through the first half of 2026, but a darkening global backdrop threatens to reverse that momentum.
Official data published Thursday showed the UK economy grew by 0.4% in the second quarter, following a stronger 0.6% expansion in the first quarter.
Business investment rose 1.7% during the same period, defying a Reuters poll of economists that had forecast a 0.5% decline.
Strong consumer spending, hot weather, England’s strong FIFA World Cup run, and rising business confidence all contributed to the better-than-expected performance.
Sanjay Raja, Deutsche Bank’s chief UK economist, said the figures keep the country on track to record the strongest growth of any G7 nation for a second consecutive quarter.
Raja noted that the latest data brought the annualized growth rate across the first half of the year to a “scorching” 2%, a figure that would have seemed unlikely not long ago.
“Some slowdown remains likely,” Raja added, particularly as higher prices at the pump squeeze household incomes, though he noted “for the first time in a while, we now see modest upside risks brewing.”
However, the economic outlook facing new UK Prime Minister Andy Burnham is far from straightforward, with the Iran war casting a long shadow over the second half of the year.
In April, the International Monetary Fund warned that the US and Israel’s war with Iran would hit the UK’s growth prospects harder than any other wealthy country.
Bloomberg reported Wednesday that Treasury officials had presented worst-case scenario modeling to Burnham, suggesting growth could slow to just 0.3% next year if disruption on the Strait of Hormuz persists.
The Treasury did not respond to a request for comment on the reported figures, leaving markets and policymakers to weigh the potential damage independently.
The UK is particularly exposed to higher energy prices given its reliance on oil and gas imports, and has already experienced sharper goods inflation than most of its peers in recent years.
Tomasz Wieladek, chief European macro economist at T. Rowe Price, said there were encouraging signs that UK growth had shifted from government spending toward stronger private sector performance.
Despite those encouraging signs, Wieladek warned that the notion the Middle East conflict had left the British economy unscathed is “likely too good to be true.”
“Normally, growth in the first two quarters is reported to be much stronger than in the second half of the year,” Wieladek said, suggesting the current optimism may not survive the autumn.
Shaniel Ramjee, co-head of multi asset at Pictet Asset Management, pointed out that growth remains heavily concentrated in the UK’s dominant services industry rather than spread across the broader economy.
“The hot weather has helped the services sector, but in fact, when we have a global infrastructure boom, our construction sector and our industrial production sector are down on the year,” Ramjee told CNBC.
