UK economy contracts in second quarter as Iran war impact bites household budgets

The UK economy contracted by 0.2% in the second quarter, its first quarterly fall since the post-lockdown rebound. According to the Office for National Statistics (ONS), the services sector shrank by 0.3% while manufacturing edged up 0.1%. ONS economist Liz McKeown said the "energy shock from the Iran war landed on top of high interest rates and clearly weighed on consumption."

The Office for Budget Responsibility (OBR) cut its full-year 2026 growth forecast from 1.1% to 0.5%. Chancellor Rachel Reeves said she could loosen the fiscal rule at the autumn budget in November, and sterling closed 0.8% weaker against the US dollar after the figures. Former Bank of England chief economist Andy Haldane told the BBC that "even if we avoid recession, the lost growth will be felt for years to come."

Reeves also confirmed Britain will phase out all imports of Russian diesel and jet fuel by year-end. The move is intended to safeguard revenue against the volatility in oil prices that the possible reopening of the Strait of Hormuz could bring. A spokesperson for the Confederation of British Industry (CBI) called the figures "expected but no less unwelcome." This is not investment advice.