UK growth holds firm despite Iran conflict risks and energy price pressures

The United Kingdom economy recorded a 0.4 per cent expansion in the second quarter, maintaining its position as the fastest-growing major advanced economy. Official data released on Thursday confirmed this growth followed a 0.6 per cent rise in the first quarter, keeping annualised growth for the first half of the year at two per cent. Business investment increased by 1.7 per cent during the period, defying forecasts that had predicted a 0.5 per cent decline. This performance suggests the UK is on track to record the strongest growth among G7 nations for a second consecutive quarter.

Consumer spending exceeded expectations in recent months, driven by favourable weather conditions, strong performances by the England football team in the FIFA World Cup, and rising business confidence. Sanjay Raja, chief UK economist at Deutsche Bank, described the first-half growth rate as scorching but noted that modest upside risks are now emerging after a prolonged period of uncertainty. He cautioned that some slowdown remains likely as higher fuel prices continue to squeeze household incomes.

Despite these positive indicators, the economic outlook for Prime Minister Andy Burnham faces significant headwinds from geopolitical instability. The International Monetary Fund warned in April that the ongoing conflict between the US and Israel with Iran would impact UK growth prospects more severely than any other wealthy nation. The UK’s heavy reliance on oil and gas imports exposes it to volatile energy prices, while goods inflation has risen more sharply than in peer countries.

Treasury officials have reportedly presented worst-case scenario modelling to the Prime Minister, suggesting that persistent disruption to shipping through the Strait of Hormuz could reduce growth to just 0.3 per cent next year. The Treasury did not respond to requests for comment on these figures. Tomasz Wieladek, chief European macro economist at T. Rowe Price, acknowledged the shift from government-led to private-sector-driven growth but warned that assuming the British economy has escaped unscathed by the Middle East conflict is overly optimistic. He noted that first-half growth is typically stronger than in the latter part of the year.

Shaniel Ramjee, co-head of multi asset at Pictet Asset Management, highlighted that recent gains were concentrated within the services sector, which benefited from the warm weather. Conversely, construction and industrial production sectors have declined on a yearly basis, missing out on the broader global infrastructure boom.