Key facts
- UK GDP grew 0.4% in the second quarter, with a 0.3% rise in June.
- The services sector drove growth, while construction struggled.
- Analysts warn that temporary factors like sporting events and heatwaves flattered the figures.
- Future growth is threatened by rising energy prices and borrowing costs.
- Geopolitical risks in the Middle East, particularly concerning Iran and the Strait of Hormuz, pose a significant threat to the UK economy.
- The government faces pressure to deliver a budget that boosts confidence amidst economic uncertainty.
The UK economy demonstrated unexpected resilience in the second quarter, growing by 0.4% and surpassing G7 forecasts despite global uncertainties, including the war in Iran and its impact on energy prices. Official data from the Office for National Statistics revealed a 0.3% increase in economic activity in June, exceeding expectations.
The services sector was the primary driver of this growth, expanding by 0.5%, while production remained flat and the construction sector saw a modest 0.3% expansion. This performance suggests businesses and consumers have largely weathered recent price shocks.
However, analysts caution that this resilience may be partly due to temporary factors such as favorable weather conditions and sporting events. Looking ahead, economists predict growth will moderate as the effects of higher prices and increased borrowing costs filter through to households and businesses. Deutsche Bank forecasts 1.1% annual growth, an upward revision from the IMF's 0.8% projection.
Significant geopolitical risks loom, with warnings that the UK economy's future trajectory is heavily dependent on the actions of President Trump and Iran in the Middle East. The potential blockage of the Strait of Hormuz could lead to a severe economic slowdown, with Treasury predicting growth of only 0.3% and the Bank of England indicating a potential interest rate hike if the strait remains closed. EY economists have also warned of a possible recession if oil and gas supplies from the Gulf region are disrupted.
Chancellor John Healey faces pressure to deliver a confidence-boosting budget, with economists from Capital Economics suggesting that fiscal constraints and spending commitments might necessitate tax increases of around £25 billion. The government aims to implement policies focused on devolution and regional investment to drive growth.