Recent data shows the UK economy outperformed expectations, leading the G7 in growth during the first half of the year. However, the energy shock from the Iran conflict is emerging as the biggest concern, with analysts warning that the second half could see a sharp slowdown, potentially dragging down next year's growth significantly.
Growth exceeds forecasts: a 'sizzling' first half
Data released on Thursday revealed that UK GDP rose by 0.4% in the second quarter, following a 0.6% gain in the first quarter. Business investment also increased by 1.7% over the same period, far surpassing economists' expectations of a 0.5% decline. Sanjay Raja, Chief UK Economist at Deutsche Bank, noted that these figures put the UK on track to be the fastest-growing economy in the G7 for a second consecutive quarter, with an annualized growth rate of a 'sizzling' 2% in the first half. He added that while some slowdown is possible, 'for the first time in a while, we are seeing modest upside risks building.' Key drivers of this growth include a sustained heatwave boosting consumer spending, strong performances by the England team in the 2026 World Cup, and a rebound in business confidence. Tomasz Wieladek, Chief European Economist at T. Rowe Price, believes the growth engine has shifted from government spending to the private sector, which is a positive sign.
War clouds gather: energy prices pose the biggest threat
Despite the bright short-term data, the shadow of the Iran conflict is hard to ignore. Disruptions in the Strait of Hormuz are pushing up energy prices, and the UK, being highly dependent on oil and gas imports, is particularly vulnerable. The International Monetary Fund (IMF) warned as early as April that this conflict would hit the UK's growth prospects harder than any other wealthy nation. On Wednesday, Bloomberg reported that UK Treasury officials have presented worst-case scenario models to new Prime Minister Andy Burnham. According to these models, if the Strait of Hormuz remains disrupted, economic growth next year could be as low as 0.3%. The Treasury has not commented on this.
Outlook for the second half is far from optimistic
Many economists believe the current resilience 'may be too good to be true.' Wieladek pointed out that first-half growth is typically much stronger than the second half. Shaniel Ramjee, Co-Head of Multi-Asset at Pictet Asset Management, cautioned that growth is heavily concentrated in the dominant services sector, while construction and industrial production have actually fallen year-on-year. Against the backdrop of a global infrastructure investment boom, the UK's real economy sectors are showing weakness. Combined with the squeeze on household incomes from rising oil prices, the growth momentum in the second half is likely to weaken significantly. Overall, the UK is enjoying a 'summer surge' driven by a heatwave and sporting events, but the energy shock from the Iran conflict is quietly building power. Whether this G7-leading growth boom can continue ultimately depends on the direction of the Middle East situation.
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