The UK economy posted another fairly solid quarter of growth in the three months to June. GDP rose by 0.4 per cent (chart 1, source: ONS); a slight moderation on the 0.6 per cent growth reported in the first quarter of 2026. This, nevertheless, represents a resilient performance given the headwinds, primarily caused by the ongoing US-Iran conflict. 

At the broad sector level, trends were positive in Q2 with manufacturing, construction, and services all contributing to growth, but the latter was the main driver of the expansion in GDP. However, at the sub-sector level the increase in output was more variable.

While services output rose by 0.5 per cent on the quarter, it was B2B tech-intensive services, such as scientific and professional services, and ICT, that continued to lead the way. These are likely to be some of the most AI-focused industries, in terms of development and adoption, so potentially some early indications in the data of real-world impact.

Linked to this, the data also show a somewhat unexpected increase in business investment in Q2. The ONS noted that the growth in gross fixed capital formation was driven mainly by increases in information and communication technology, and other machinery and equipment, especially hardware investment.

Consumer-facing services sectors also held up, with output increasing by 0.3 per cent, despite a renewed wave of cost-of-living pressures hitting households as a result of higher petrol and transport costs and rising borrowing costs emanating from market volatility caused by geopolitical tensions in the Middle East. Growth was also skewed towards the end of the quarter, when hot weather and the World Cup buoyed spending. 

Manufacturing also posted a third consecutive quarter of output growth. Surveys have pointed to some stockpiling activity in response to concerns about supply chain disruptions, which will have brought forward production. Construction also posted modest growth of 0.3 per cent compared with the previous quarter, supported by both new infrastructure work and repair and maintenance. However, the monthly profile remained weak and output levels are still some two per cent down on the same period a year ago. 

Looking ahead, business surveys such as the S&P Global PMIs, started the second half of the year in positive territory, and there does appear to be some momentum in parts of the service sector. The impact of the conflict, however, does present ongoing risks to growth. The Bank of England’s central forecast expects a moderation in headline GDP growth through to the end of the year.

Inflation rises with energy price cap

CPI rose, as expected, to 2.9 per cent in July (chart 2, source: ONS). The increase was anticipated as the higher energy price cap for households kicked in at the start of the month. Household gas, electricity, and other fuels prices were, collectively, five per cent higher in July compared with a year ago, with gas the biggest driver, up eight per cent on a year ago. 

The impact of higher oil prices resulting from US-Iran tensions is also apparent in rising transport costs – up 9.1 per cent on a year ago. While the pace of increase has eased in recent months this could be short-lived as pump prices took off again in August, with a litre of unleaded climbing to its highest level since November 2022.

Offsetting rises in petrol and utilities prices was a fall in transport services, mainly driven by a fall in air fares. The ONS noted that this was primarily a price drop across short-haul routes as customer demand has waned. Scheduling changes caused by rising jet fuel costs also contributed as carriers cater for demand with fewer flights on some routes.

Elsewhere it does appear that disinflation is continuing. Food price inflation has fallen materially over the past year, and price rises across clothing and recreation are also more subdued. 

That said there are further upward price pressures in the pipeline. Ofgem has confirmed that the energy price cap will rise again, by four per cent, in October. Further there are risks to food prices from the recent heatwaves, disruption to fertiliser supplies, and the effects of El Nino. Forecasters expect CPI to end the year around 3.4 per cent.

US consumers feeling the squeeze

US inflation eased for the second month running in July, falling back to 3.4 per cent from May’s peak of 4.2 per cent. The fall comes on the back of an easing in the impact of the energy price shock. However, there were still big double-digit increases in petrol and fuel oil prices.

The still-rapid rises in these very visible costs for households are contributing to weak confidence across households in the US (chart 3, source: University of Michigan). The latest consumer sentiment index from the University of Michigan fell again in August following a short-lived recovery from May’s historic low, and the reading of 51 remains below the post-pandemic average. Consumer views on both current conditions and future expectations were down on the previous month and on the same period a year ago.

Inflation expectations also remain elevated; year ahead expectations ticked up from 4.2 per cent in July to 4.3 per cent in August, substantially above the 3.4 per cent reported in February before the Iran conflict began.

The August report saw a deterioration in sentiment across political and demographic groups. It noted particularly sharp declines among older respondents and those on lower incomes who are more exposed to rising prices. 

With no end in sight for the conflict and transit through the Strait of Hormuz still largely restricted, cost-of-living concerns are likely to influence voters heading into the mid-term elections in the autumn. Even amongst Republicans, the University of Michigan survey shows sentiment is 19 per cent below readings just prior to the Iran conflict and the lowest since the 2024 election. President Trump’s approval ratings have also sunk in recent months, with 64 per cent of American’s disapproving of his performance – matching the low point of his previous presidency. A durable end to Middle East tensions is a political as well as an economic priority. 

Oil price shock absorber

Brent futures only briefly returned to pre-conflict levels after the first ceasefire negotiations in June. As attacks in the Strait have continued, sporadically, and both sides trade threats of escalation, Brent has bounced between $80 and $90 throughout the summer (chart 4, source: Investing.com). While this continues to put upward pressure on global inflation, prices have not reached the heights of May’s peak, nor have they come close to some of the worst-case-scenario forecasts in the early days of the conflict.

Markets have been responding to political assurances that a deal is close. But a bigger factor in keeping a lid on oil price increases has been the actions of China in three areas.  

1. There was a significant decline in Chinese imports of crude oil through 2026 Q2. Net imports were around 30 per cent lower than April-June 2025, equivalent to 3.5 million barrels per day.
2. There has been a reduction in refinery throughput during Q2, accelerating in June due to reduced supplies and rising transport costs. There were also restrictions on refined product exports to maintain supplies for the domestic market.
3. Petrol prices have, however, continued to rise, furthering pushing down on demand. There has been a significant growth in electric vehicles in the Chinese market in recent years. Rising transport fuel prices are accelerating this, in addition to reducing journeys in petrol cars. 

As China accounts for around a fifth of global oil imports, the actions above are estimated to have had an impact on holding down prices – estimates suggest these have kept Brent around $30 lower. Moreover, this appears to have had a limited impact on economic output with GDP estimated to have increased at an annual 4.3 per cent in Q2. 

While some of the reduction in demand is structural (i.e. the push towards electric vehicles), China is unlikely to replenish its significant stocks while prices remain elevated. Analysts predict Q4 demand will remain lower than in the previous year. 

ICYMI and coming up

In August our quarterly Arrears and Possession release brought positive news on the downward trend in both mortgage arrears and home repossessions. This was widely reported in the main and specialist press. 

We also published our annual UK Payment Markets report, which covers payment trends across the UK economy last year and forecasts to 2035. 

September sees the release of our quarterly Household and Business Finance Reviews, as well as out updated Regional Mortgage factsheets.

You can access all our data release on the UK Finance website, with full member data available on the UK Finance portal. 

Key indicators

Source: ONS, HM Treasury, Bank of England, EIA

*Q4 2026