UK Economy Shows Resilience Amid Energy Shock Fueled by Iran War

The UK economy demonstrated surprising resilience in the second quarter, expanding by 0.4% despite the energy crisis triggered by the Iran war and subsequent cost increases, though analysts warn that soaring energy prices could dampen this momentum in the coming months.

Q2 Performance Amidst Geopolitical Headwinds

Official figures from the Office for National Statistics (ONS) reveal that UK economic growth slowed to 0.4% in the three months to June, down from 0.6% in the first quarter. While this deceleration aligns with City economists' expectations, the data suggests the economy has weathered the ongoing geopolitical storm better than initially feared.

■Services output expanded by 0.5% across the quarter, while construction saw a 0.3% rise.

■Industrial production, encompassing manufacturing and energy, remained flat.

■The information and communication sector surged by 2.7%, driven primarily by a significant upturn in computer programming.

■In the single month of June, GDP defied forecasts of zero growth to rise by a better-than-expected 0.3%.

Energy Inflation and the Inflationary Outlook

Oil and gas prices spiked following the attacks on Iran in late February, creating a cost-of-living squeeze that is now beginning to weigh heavily on growth. Although consumer utility bills were shielded by the energy price cap until July, the removal of this barrier resulted in an immediate 13% jump in costs. Yael Selfin, chief economist at KPMG, noted that while consumers have weathered shocks remarkably well, the momentum is likely to fade over the coming months.

Sanjay Raja, chief UK economist at Deutsche Bank, pointed out that warmer weather and World Cup-related spending helped buoy demand, keeping retail and hospitality revenues up. However, economists broadly expect rising energy costs to stifle growth through the remainder of 2026. Stuart Morrison of the British Chambers of Commerce emphasized that headline figures should not disguise the "cocktail of cost pressures" choking long-term business growth amidst global headwinds from the conflict.

The surge in energy prices triggered by the Iran conflict is directly pushing up aviation fuel (Jet A1) costs. The 2.7% growth in the information and communication sector signals sustained resilience in air cargo demand for high-tech products. However, rising fuel costs are squeezing airline operational margins, while the inflationary pressure in the UK could trigger interest rate hikes, further increasing the cost of capital for global supply chains.