In the spring the International Monetary Fund warned Britain faced the heaviest economic blow from the Iran war among the world’s most advanced nations. Almost six months into the conflict, on the surface, the UK appears to be proving the forecasters wrong.
The latest official figures show the UK maintained its pole position as the fastest growing economy in the G7 in the first half of 2026. Despite the gloomy international backdrop and yet more domestic political uncertainty, consumers have largely continued spending and business investment has boomed.
According to the Office for National Statistics, GDP growth slowed to 0.4% in the three months to June. But that slowdown, which was predicted by City economists, followed a bumper 0.6% growth rate in the first quarter. The monthly figures for June also showed growth of 0.3%, beating expectations for zero growth.
Most City analysts say the economy is showing unexpected signs of resilience. Hotter weather and the England men’s football team reaching the semi-final of the World Cup helped to fuel an upturn in consumer spending, with growth of 0.3%. Business investment jumped by 1.7%. Analysts say a big step up in the IT sector suggests the build out of computing power needed to run artificial intelligence played a contributing role.
As a result, the number crunchers will more than probably need to revisit their forecasts, with an upgrade likely for the year. Deutsche Bank said it estimates a new annual growth figure of 1.1% – significantly above the IMF’s spring forecast for Britain’s economy to grow by 0.8%.
For the new chancellor, John Healey, the figures are good news as he prepares to present his first budget on 28 October. They are also a crumb of comfort for his ousted predecessor, Rachel Reeves, who had claimed Britain could beat the downbeat forecasts made by the IMF.
However, there are reasons why the unexpected resilience of Britain’s economy is unlikely to last.
After the surge in global oil prices prompted by the Iran war, and continuing market volatility, UK consumers may have fared better than expected amid the jump in petrol and diesel prices. But they were insulated from the rise in household gas and electricity bills by lower levels of energy demand during the summer months and the Ofgem energy price cap.
The latest GDP figures cover the period when bills were protected. The cap then jumped by 13% from the start of July, which experts say could push millions of households into fuel poverty. Andy Burnham’s “breathing space” measures to ease the cost of living, including cutting VAT to reduce consumer electricity bills by an average of £45 a year from October, will help. But headline inflation remains elevated and household resilience is thin after years of price growth.
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The stop-start fighting in the Middle East could add further to the pressure on energy costs, as global oil prices remain elevated. Geopolitical tensions are also bad news for business investment.
For Healey, there is also the headache of how to pay for the measures to soften the financial blow for households and businesses, at the same time as finding space within the fragile public finances to accommodate higher defence spending and the prime minister’s new spending priorities – including more cash for housing and infrastructure.
Leaked Treasury forecasts, compiled before the latest data, show the economy growing by 0.9% this year, according to Bloomberg. That is below the 1.1% forecast by the Office for Budget Responsibility in March. If weaker growth and higher inflation persists over the five-year forecasting window, that will make the arithmetic tougher for Healey.
