UK Economic Growth Slows as Energy Price Shock Hits Households

UK GDP (the total value of goods and services the country produces) grew by 0.4% in the three months to June 2026, down from 0.6% in the first quarter, according to the Office for National Statistics. The slowdown followed a surge in oil and gas prices after the US military struck Iran at the end of February, pushing up industrial costs and household energy bills.

On a monthly basis, GDP grew by 0.3% in June alone, beating the flat reading that City economists had forecast. That monthly uptick partially offsets the broader quarterly slowdown, but it does not reverse the loss of momentum visible across the three-month comparison.

The sector-by-sector breakdown tells the core story. Services output — which covers everything from banking to IT to hospitality — expanded by 0.5% in Q2, after growing 0.6% in the three months to May (revised down from 0.7%). Construction grew by 0.3%. Industrial production was flat, following growth of 0.2% in the three months to May (revised up from 0.1%). The stalling of industrial output tracks the energy price trajectory: oil and gas costs rose after the Trump administration's strikes on Iran in late February, and while the UK's retail energy price cap (a government-set limit on what suppliers can charge households) shielded consumers until July, that buffer has now expired. The cap jumped by 13% in July, passing elevated wholesale costs directly to households.

Within services, information and communication businesses grew by 2.7%, led by an upturn in computer programming. That concentration of growth in digital and tech-adjacent services echoes the Q1 pattern, where services contributed the largest share of GDP expansion, growing by 0.8% across all three sectors.

The first-quarter data, confirmed by the ONS on 30 June, showed real GDP growth of 0.6% — unrevised from the initial estimate published in May. Reuters independently confirmed that figure. Q1 2026 followed revised growth of just 0.1% in Q4 2025, a figure that came in below the 0.2% forecast by economists polled by Reuters and the Bank of England. For calendar year 2025, UK GDP grew by a revised 1.3% (down from a previous 1.4%), following 1.0% growth in 2024.

The ONS time series places UK chained volume measure GDP (GDP adjusted for inflation) at £712,545 million for 2026 Q2, with year-on-year growth of 1.2%. GDP at current market prices stood at £786,629 million for the quarter. The next release is scheduled for 30 September 2026.

On inflation, UK CPI (the Consumer Prices Index, the main measure of inflation) for July 2026 is expected to come in above June's 2.6%, reflecting the utility bill increases that took effect at the start of the month. The combination of slowing growth and rising inflation narrows the policy space available to Chancellor John Healey, who is due to present his first budget on 28 October 2026. Andy Burnham announced a VAT cut for electricity bills in July, though the fiscal mechanics and timeline of that measure remain to be detailed.

The broader context here is a UK economy caught between a geopolitical energy shock and a domestic fiscal calendar that offers limited room for early intervention. The Q1-to-Q2 slowdown from 0.6% to 0.4% is not, in isolation, a dramatic contraction. But the composition matters: growth is increasingly concentrated in digital services while industrial output stalls and household energy costs step up sharply. The 13% utility price cap increase in July is the mechanism through which the Iran-related energy disruption reaches consumer balance sheets, and July inflation data will be the first clear read on that transmission. If services growth begins to soften under the weight of household cost pressures, the narrowness of the current expansion becomes a more pressing concern for the Treasury ahead of the October budget.

The quarterly national accounts released on 30 June revised Q4 2025 growth down to 0.1% and 2025 annual growth down to 1.3%, suggesting the pre-existing momentum was weaker than initially assessed even before the energy price shock fed through. The June monthly figure of 0.3% growth, against a consensus of zero, suggests some residual resilience — but a single month's outperformance does not offset a quarter in which the growth rate fell by a third relative to Q1.