England fans react during the 2026 FIFA World Cup match between England and Croatia at Croydon Box Park on June 17, 2026 in London, England.
Alicia Abodunde | Getty Images News | Getty Images
The UK economy is showing further signs of a long-awaited recovery, but the fallout from the Iran war and rising energy prices are complicating the situation.
Britons have been spending more than expected in recent months due to hot weather, England’s strong performance at the FIFA World Cup and rising business confidence.
The UK economy grew by 0.4% in the second quarter, after expanding by 0.6% in the first quarter, official data released on Thursday showed. Capital investment rose 1.7% in the same period, lower than the 0.5% decline expected by economists polled by Reuters.
Sanjay Raja, chief UK economist at Deutsche Bank, said on Thursday the figures put the country on track to record the highest growth among G7 countries for the second consecutive quarter. Mr Raja said the latest figures put the annual growth rate in the first half of this year at a “scorching” 2%.
“Some degree of economic slowdown is still possible,” Mr. Raja added, especially as rising prices put pressure on household incomes. “But for the first time in a while, we see a slight upside risk emerging.”
But the economic outlook facing Britain’s new prime minister, Andy Burnham, is not all rosy.
The International Monetary Fund warned in April that the US and Israel’s war with Iran, which shows little sign of ending, would hit Britain’s growth prospects more than any other wealthy country.
The UK is highly exposed to rising energy prices due to oil and gas imports, and has also suffered from sharper price increases than most of its peers in recent years.
Bloomberg reported Wednesday that Treasury officials presented Burnham with worst-case scenario modeling. Finance Ministry figures reportedly suggest that growth could slow to just 0.3% next year if the Strait of Hormuz disruption persists. The Treasury Department did not respond to CNBC’s request for comment.
Tomasz Wieradek, chief European macroeconomist at T. Rowe Price, said there were encouraging signs that the engine of growth in the UK was shifting from higher government spending to stronger private sector performance.
But Wierardek added that the idea that the Middle East conflict had left the UK economy unscathed was “probably too good to be true”.
“Typically, growth in the first two quarters is reported to be much stronger than in the second half,” Willadek said.
Shaniel Ramsey, co-head of multi-asset at Pictet Asset Management, highlighted that growth is concentrated in the UK’s key services industries.
“While the heatwave helped the services sector, the construction and industrial production sectors are actually weaker than last year due to the global infrastructure boom,” Ramsey told CNBC.
