United Kingdom Monthly Outlook – August 2026
- A.Enes TEKCAN
- 1 day ago
- 20 min read
In the second quarter of 2026, the United Kingdom economy recorded growth despite unfavorable conditions arising from global geopolitical developments and domestic political uncertainty. The negative impact of the Iran-Israel-US conflict, which began in February, on global energy markets; the ceasefire announced in April but characterized by limited sustainability; the leadership change within the governing party and the subsequent cabinet reshuffle; and the fiscal policy uncertainty emerging ahead of the autumn Budget were the main factors affecting the economic outlook during the period.
At the same time, the United Kingdom went through a significant period of political transition. Since May 2025, criticism of Prime Minister Keir Starmer’s leadership had intensified. Disagreements over immigration policy, tax increases, the government’s position on Gaza, and welfare reform deepened opposition to the government. The return of former Mayor of Greater Manchester Andy Burnham to Parliament after winning a by-election on 18 June strengthened expectations of a leadership change. Starmer announced his decision to resign on 22 June 2026. Burnham was subsequently elected as leader as the sole candidate with the support of more than 94% of Members of Parliament and became Prime Minister. This change marked the appointment of the seventh prime minister to serve within a decade and is regarded as another indication of the persistence of political instability.
In the Burnham government’s cabinet reshuffle, former Chancellor of the Exchequer Rachel Reeves was dismissed and replaced by former Defence Secretary John Healey. This change increased uncertainty surrounding market expectations regarding the direction of fiscal policy. The first Budget expected to be presented in the autumn has consequently become a closely monitored issue, particularly with regard to the size of the public finance deficit and potential tax measures.
Against this backdrop, data released by the Office for National Statistics (ONS) showed that the United Kingdom economy grew by 0.4% between April and June, in line with market expectations. This performance placed the country among the G7 economies with the highest growth rates in the first half of 2026. However, a significant portion of the recorded growth is considered to have been driven by temporary factors, including the cyclical relief provided by the temporary ceasefire in the Iran war, increased consumer spending associated with the World Cup, and weather conditions above seasonal norms. The weakening trend in the labor market, the widening public finance deficit, and persistent inflationary pressures stand out as downside risks to growth performance in the second half of the year.
During the same period, inflation began to trend upward, driven by a marked increase in natural gas prices. The Bank of England adopted a cautious policy stance in response to volatility in energy prices and decided to leave its policy rate unchanged. Labor market indicators showed a slowdown in wage growth, a broadly stable unemployment rate, and a decline in the number of job vacancies, pointing to a slowdown in economic activity. In foreign trade, energy-related fluctuations remained the dominant factor, while the housing market maintained relative stability but continued to exhibit a weak overall performance.
This report provides a comprehensive analysis of recent developments in the United Kingdom economy, focusing on growth, inflation, the labor market, foreign trade, the housing market, and the impact of recent political changes on economic conditions.
i. Economic Growth
Economic growth data for the second quarter of 2026 illustrate the resilience the UK economy has shown in the face of the energy price shock triggered by the Iran war, domestic political turmoil, and fiscal uncertainty. According to official data released by the Office for National Statistics (ONS) on 13 August 2026, real gross domestic product (GDP) rose by 0.4% in the April-to-June period. Although this rate came in below the 0.6% growth recorded in the first quarter, it matched the market consensus (0.4%) and placed the UK among the fastest-growing G7 economies in the first half of 2026.
UK Quarterly Growth Rates (%)
The quarterly picture shows that the economy managed to sustain growth despite the surge in energy prices triggered by the Iran-Israel-US conflict that began in February 2026, the leadership crisis in Westminster, and tax uncertainty ahead of the autumn Budget. The acceleration seen in June is largely attributed to conjunctural factors, the temporary relief provided by the ceasefire in Iran, the start of the World Cup and above-average temperatures, while structural issues such as labour-market weakness and the growing public finance deficit are expected to weigh on growth in the second half of the year.
According to ONS data, real GDP grew by 0.4% quarter-on-quarter in the second quarter of the year. While this points to a slowdown from the 0.6% growth recorded in the first quarter, it was in line with the roughly 0.4% market expectation reflected in the Reuters poll. On an annual basis, real GDP rose by 1.2%. Real GDP per head increased by 0.4% in the second quarter and was up 1.0% year-on-year. Nominal GDP grew by 0.8% over the same period, taking the year-on-year increase to 4.1%. The GDP implied deflator rose by 2.9% year-on-year, indicating that rising price levels - alongside volume growth - contributed to the increase in total income.
The monthly growth figures clearly reflect the volatility within the second quarter: the economy contracted by 0.1% in April (revised up from an initial estimate of -0.3%), was flat in May (revised down from the previously published 0.1% growth), and then grew by 0.3% in June - well above the market expectation of 0.0%. This surprise increase in June is largely attributed to the temporary relief in energy prices following the ceasefire in the Iran war, the start of the FIFA World Cup on 11 June, and weather conditions that the Met Office described as the UK's second-warmest June on record. Growth in June was driven mainly by a 0.4% rise in services, which was partially offset by falls in production (-0.2%) and construction (-0.1%).
GDP Growth Rates (Monthly, %)
Taken together, the slowing but still positive quarterly growth and the renewed increase in output per head suggest that economic activity continued along a resilient — though fragile — expansion path in the second quarter of 2026, despite geopolitical risks. However, the Bank of England's assessment that underlying growth is running at around 0.1%, well below the 0.3% growth it had forecast for the second quarter, and its expectation that growth will slow to near zero in the third quarter, suggest that the second quarter's performance was substantially driven by temporary factors.
Services
Services, the largest component of the economy, grew by 0.5% in the second quarter. Although this was below the 0.8% increase recorded in the previous quarter, the sector remained the strongest contributor to the economy's overall growth momentum. Services output was up 1.5% year-on-year.
Looking at the sub-components, business-facing services grew by 0.5%, while consumer-facing services expanded by 0.3%. The sector's strongest contribution came from information and communication, which grew by 2.7%, driven in particular by a 3.7% rise in computer programming, consultancy and related activities. The second-largest contribution came from professional, scientific and technical activities, which grew by 1.7%, led by advertising and market research (up 4.3%), scientific research and development (up 3.9%), and legal activities (up 2.5%).
By contrast, administrative and support service activities contracted by 0.9%, with declines of 2.8% in office administrative, office support and other business support activities and 7.9% in security and investigation activities. In June specifically, accommodation stood out with 3.9% growth among consumer-facing services, alongside a World Cup-driven rise in retail trade (up 0.5%), while travel agency, tour operator and related reservation services fell by 2.4%.
Production
The production sector showed no growth (0.0%) in the second quarter, making no contribution to overall growth. This marks a notable slowdown following the 0.2% increase recorded in the first quarter. On an annual basis, production output rose by 0.3%.
Manufacturing grew by 1.0%, and mining and quarrying by 0.2%. These gains were substantially offset by declines of 2.3% in electricity, gas, steam and air-conditioning supply and 3.7% in water supply, sewerage and waste management. Within manufacturing, the pharmaceutical industry stood out with growth of 4.2%, followed by computer, electronic and optical products (up 3.0%) and machinery and equipment (up 2.6%). By contrast, transport equipment manufacturing fell by 0.7%, electrical equipment manufacturing by 3.1%, and other manufacturing and repair by 0.8%. In June alone, a 5.1% monthly fall in pharmaceutical manufacturing was the main driver of the 0.5% monthly decline in manufacturing output.
Construction
The construction sector grew by 0.3% in the second quarter, although this points to a 2.0% year-on-year decline. New work rose by 0.4% and repair and maintenance by 0.2% over the period. The largest contribution to growth in new work came from infrastructure new work, which grew by 1.9%. On the repair and maintenance side, public housing repair and maintenance, up 2.5%, stood out. In June specifically, construction output fell by 0.1% on the month, driven mainly by an 11.0% sharp fall in public housing new work. The ONS noted that hot, dry weather had a negative effect on some construction activities, but that infrastructure investment continued to provide momentum to the sector over the quarter as a whole.
Political and Macroeconomic Assessment
The second-quarter 2026 growth data were published in the middle of a significant political transition. The quarter spanned Prime Minister Keir Starmer's resignation announcement on 22 June 2026, following mounting pressure within his own party, and the arrival in office of former Greater Manchester Mayor Andy Burnham on 20 July. In Burnham's cabinet reshuffle, the previous Chancellor of the Exchequer, Rachel Reeves, was removed from her post, and former Defence Secretary John Healey was appointed Chancellor. While this leadership change has heightened market uncertainty over the direction of fiscal policy, the second-quarter growth data show that the economy remained resilient in the near term despite the political turbulence.
Although the economy grew by 0.4%, in line with expectations, a significant part of this expansion rests on temporary factors. Behind June's surprise 0.3% growth lie the easing of the energy price shock caused by the Iran war that began in late February - through a short-lived ceasefire - the consumption boost from the World Cup, and temperatures notably above seasonal norms. Indeed, the share of businesses referencing the Iran war fell from a peak of 38% in April to 31% in June, confirming the positive effect of this conjunctural relief on growth.
Business investment rose by 1.7% in the second quarter, signalling a recovery, while gross fixed capital formation grew by 1.2%, led by information and communication technology investment. Household spending posted a modest 0.3% increase, while government consumption spending contracted by 0.3%, reflecting declines in health and education - partly due to school closures during June's heatwave. This picture points to a relative recovery in the private sector alongside continued fiscal discipline pressure on the public side.
The picture from the central bank is likewise balanced but cautious. The Bank of England kept interest rates on hold despite the rise in energy prices; although the outcome was close to the 0.3% growth it had forecast for the second quarter, its assessment that underlying growth is running at around 0.1%, with a further slowdown to near zero expected in the third quarter, is notable. Ahead of the first Budget to be presented in the autumn by new Chancellor John Healey, the scale of the public finance deficit and the prospect of further tax rises remain high on the agenda for markets and business alike.
The second-quarter data show that the UK economy remained resilient in the near term despite geopolitical shocks and domestic political uncertainty, but that this resilience rests substantially on temporary conjunctural factors. Continued volatility in energy prices, the uncertainty the political leadership change could create for fiscal policy, and the tax debate ahead of the autumn Budget stand out as the main risks that could drag on growth momentum in the second half of the year.
Global Economic Environment and Energy Markets
The UK economy's performance in the second quarter was shaped to a considerable extent by the impact on global energy markets of the Iran war, which began on 28 February 2026 with strikes by the US and Israel against Iran and rapidly escalated into a regional conflict. The conflict largely halted oil and LNG shipments through the Gulf; the International Energy Agency characterised it as one of the largest supply disruptions in the history of the global oil market. Brent crude prices rose above $120 a barrel in March, pushing up fuel prices and inflation in the UK (CPI rose to 3.3% in March).
The ceasefire declared on 8 April 2026 provided temporary relief in energy prices, which was reflected positively in June's growth data; however, the subsequent lapse of the ceasefire shows that uncertainty in energy markets has not fully dissipated. The government's decision to postpone the fuel duty increase planned for September was also a step taken during this period to ease the pressure of energy costs on households and businesses.
Global uncertainty has continued to affect the economy not only through energy prices but also through supply chains. Nevertheless, the 0.5% rise in export volumes in the second quarter, and growth in chemicals exports in particular, indicate that the UK has shown a degree of resilience in trade despite global supply shocks. Import volumes also rose by 0.5% over the same period, driven mainly by higher fuel imports.
In international comparison, the UK economy's 0.4% growth in the second quarter placed it among the highest-growing G7 economies, putting the country among the fastest-growing G7 economies in the first half of 2026. At the same time, the OECD's downward revision of eurozone growth forecasts in March, citing regional energy price shocks, confirms that fragility persists in the global economic outlook. Leading indicators for July point to a recovery in retail footfall, a decline in redundancy notifications from their May peak, and an increase in flight numbers; however, 32% of businesses still cited economic uncertainty as their top concern in July, while concern over energy prices reached 70% among businesses with 10 or more employees.
ii. Inflation Rate
According to data released by the Office for National Statistics (ONS) on 19 August 2026, the UK Consumer Prices Index (CPI) rose by 2.9% in the 12 months to July 2026. This was up from 2.6% in June and marked the first rise in annual inflation since March 2026. The broader CPIH measure, which also captures owner occupiers' housing costs, rose from 2.8% to 3.1% over the same period.
On a monthly basis, CPI rose by 0.3% in July, above the 0.1% increase recorded in the same month last year. The largest driver of the rise was housing and household services, where the annual rate jumped from 1.2% in June to 4.6% in July. This was partially offset by a slowdown in transport, whose annual rate eased from 5.7% to 3.6%. According to ONS, the rise reflected upward contributions from five expenditure divisions, partially offset by downward contributions from four.
Inflation Rate (July 2016 – July 2026)
The rise in housing and household services was driven mainly by natural gas prices, which rose 14.7% year-on-year in July — the largest gas price increase since October 2022. This followed a 13% increase in the energy price cap set by regulator Ofgem from 1 July, which pushed the average annual dual-fuel bill up by £221 to £1,862. ONS noted that the 12-week assessment period Ofgem used to calculate the July-to-September price cap (18 February to 18 May 2026) was the first such period to reflect the effects of the conflict in the Middle East. Electricity prices also rose 3.6% year-on-year.
The slowdown in transport reflected falling motor fuel prices; diesel fell by 8.8 pence per litre between June and July. By contrast, long-haul airfares rose 31.7% as some airlines suspended flights because of the Middle East conflict, while European airfares fell 4.3%. Food and non-alcoholic beverage inflation eased from 1.7% to 1.3%, while clothing and footwear prices posted their smallest July fall since 2020, reflecting weaker-than-usual summer discounting amid warm weather. Core CPI (excluding energy, food, alcohol and tobacco) held steady at 2.6%, while core CPIH rose from 2.8% to 2.9%, suggesting demand-side pressures remained contained.
Policy and Market Reaction
The rise in inflation came largely as expected ahead of the Bank of England's (BoE) next Monetary Policy Committee meeting on 17 September; with the reading in line with consensus, most economists still expect the Bank to leave the policy rate on hold at 3.75%. Because the increase was driven mainly by energy costs and core measures remained well-behaved, policymakers are seen as having little reason to respond to what is regarded as a largely transient shock. Sterling showed little reaction to the release.
Chancellor of the Exchequer John Healey described the increase as being distorted by 'Iran war inflation', saying the government's VAT cut on electricity bills and the £2 cap on most bus fares were providing households with 'breathing space'. Shadow Chancellor Mel Stride criticised the government's tax policies and business measures, warning of further tax rises in the autumn Budget. In international comparison, the UK's 2.9% CPI rate came in above France's flash estimate of 2.4% and was close to Germany's 2.8% reading for July.
iii. Interest Rates
The Bank of England's (BoE) Monetary Policy Committee (MPC) voted at its meeting on 30 July 2026 to hold Bank Rate at 3.75%. This marked the fifth consecutive hold this year, and the next decision is due on 17 September 2026. Current inflation stands at 2.9%, well above the Bank's 2% target.
At the July meeting, the MPC voted by a majority of 6 to 3 to maintain Bank Rate at 3.75%; three members voted to raise the rate immediately to 4.00%. This compares with a 7-2 split at the June meeting, pointing to growing momentum on the hawkish side of the Committee. The six members who voted to hold including Andrew Bailey, judged that holding Bank Rate, combined with the significant tightening in financial conditions since the conflict began, was providing sufficient insurance against the upside risks to inflation stemming from volatile energy prices.
Interest Rates
The BoE noted that inflation had fallen a little further than expected, to 2.6% in June, but that conflict in the Middle East continues to keep energy prices high and volatile. The Bank said higher bills could force businesses to raise prices, and that it expects inflation to rise again later in the year - a view borne out by ONS data published on 19 August, which showed CPI rising to 2.9% in July. Governor Andrew Bailey said monetary policy cannot influence global energy prices, but that the Committee's job is to ensure any resulting rise in inflation does not become persistent. The MPC judged that mortgage rates and borrowing costs for firms, already higher than before the conflict, were making households and businesses more cautious about spending - helping to contain the second-round effects of higher energy prices on inflation.
According to a Reuters poll of 64 economists conducted between 13 and 18 August, around 90% (56 of 64) expect the BoE to hold Bank Rate at 3.75% through the end of the year, up from 83% the previous month. No economist polled expects a rate change at the September meeting. Financial markets, however, continue to price in a quarter-point rate rise by year-end; as of 29 July, the two-year swap rate stood at 4.20%, a 45-basis-point premium over Bank Rate, showing that fixed-rate mortgage pricing already reflects this more hawkish market view. The Reuters poll projects average growth of 1.1% in 2026 and 1.2% in 2027, accelerating to 1.5% in 2028. At his press conference, Bailey explicitly cautioned against reading the decision as a step toward a rate hike, saying the Committee would continue to monitor developments in energy prices and any potential second-round effects closely.
iv. Wages & Labor Market
Annual growth in employees' average regular earnings (excluding bonuses) was 3.5% in the UK in April to June 2026, continuing the relatively stable growth rate seen over the past four three-month periods. Annual growth in total earnings (including bonuses) was 4.1%, down from 4.3% in the three months to May. Average weekly earnings were estimated at £755 for total pay and £703 for regular pay as of June 2026.
In real terms, annual regular pay growth was 0.5% using CPIH and 0.7% using CPI, while annual total pay growth was 1.1% using CPIH and 1.3% using CPI. Real regular pay growth rose for a second consecutive period, following a recent low of 0.1% in the three months to April 2026, though it remains well below the 2.6% rate recorded in June 2024.
By sector, annual regular earnings growth in the public sector was 6.1%, up from 5.5% in the previous three-month period, reflecting a base effect from some NHS staff pay rises being paid earlier in 2026 than in 2025. In the private sector, annual regular earnings growth slowed to 2.8% — the weakest rate since October 2020. After the public sector, the wholesaling, retailing, hotels and restaurants sector showed the strongest regular annual growth rate, at 3.5%, while construction was the weakest, down 0.1% on the year. The finance and business services and manufacturing sectors remained relatively stable, at 2.3% and 2.8% respectively.
Average Weekly Earnings (Seasonally Adjusted)
The UK unemployment rate for people aged 16 and over was estimated at 4.9% in April to June 2026, unchanged on the quarter despite City forecasts of a fall to 4.8%; this represents a 0.2 percentage point rise on the year, but a 0.1 percentage point fall on the previous quarter. The employment rate for people aged 16 to 64 stood at 75.1%, down 0.2 percentage points on the year but up 0.1 percentage points on the quarter. The economic inactivity rate was 20.9%, largely unchanged on both the year and the previous quarter.
According to HMRC administrative data, the number of payrolled employees fell by 78,000 (0.3%) between June 2025 and June 2026, and by a more modest 13,000 (0.0%) between May and June 2026. The early estimate for July 2026 points to a further annual fall of 94,000 (0.3%), taking payrolled employees to 30.3 million; this figure is subject to revision next month. The Claimant Count fell on both the month and the year in July, to an estimated 1.665 million.
Unemployment Rates (Seasonally Adjusted)
Vacancies also continued to decline: early estimates for May to July 2026 point to a fall of 6,000 (0.8%) to 707,000, compared with the February to April period. Outside the coronavirus pandemic period, this is the lowest number of vacancies recorded since September to November 2014. Feedback from the ONS Vacancy Survey suggests that some small firms are holding off on recruitment because of rising labour costs and other operating expenses.
According to the Guardian, the figures present a significant test for Prime Minister Andy Burnham's government as it seeks to ease the financial pressure on households ahead of a difficult autumn Budget; Burnham used his first week in office to announce a series of 'breathing space' measures and has made tackling youth unemployment a priority. The number of 16- to 24-year-olds not in education, employment or training (NEET) has surpassed one million for the first time in more than a decade, and a review by former Cabinet minister Alan Milburn is expected to report this autumn. Work and Pensions Secretary Pat McFadden described the rise in employment and the fall in the unemployment rate as 'encouraging', while economists suggested the softer labour market could strengthen the case for the Bank of England to hold off on further rate rises.
v. International Trade
Total goods imports fell by £0.4 billion (0.7%) in current prices in June 2026, with decreases from both the EU and non-EU countries. This decline reflected a £0.1 billion (0.3%) fall in imports from the EU and a £0.3 billion (1.0%) fall in imports from non-EU countries. Goods exports, meanwhile, fell sharply by £2.2 billion (6.3%) over the same month, driven by a £1.3 billion (7.4%) decline in exports to the EU and a £1.0 billion (5.4%) decline in exports to non-EU countries.
EU and Non-EU Goods Imports (June 2023 – June 2026)
As of June 2026, imports from the EU stood £2.8 billion higher than imports from non-EU countries, while exports to the EU were £1.2 billion lower than exports to non-EU countries. After removing the effect of inflation (chained volume measures), total goods imports rose by £0.6 billion (1.1%) in June, driven by a £0.8 billion (3.3%) rise in imports from non-EU countries, partially offset by a £0.2 billion (0.8%) fall in imports from the EU. Goods exports fell by £1.5 billion (4.7%) in volume terms over the same period.
EU and Non-EU Goods Exports (June 2023 – June 2026)
At the commodity level, the fall in imports from the EU was driven by a £0.2 billion decline in fuel imports and £0.1 billion falls in both chemicals and material manufactures, partially offset by a £0.2 billion rise in machinery and transport equipment imports linked to higher car imports from Germany. The fall in imports from non-EU countries was driven mainly by a £0.2 billion decline in fuel imports, reflecting lower imports of refined oil from the United States following a fall in oil prices after the US-Iran ceasefire extension announced on 17 June.
On a quarterly basis, the total goods and services trade deficit widened by £0.3 billion to £8.0 billion in the second quarter of 2026 (April to June), compared with the previous quarter. The trade in goods deficit widened by £1.2 billion to £60.7 billion, while the trade in services surplus grew by £0.9 billion to £52.7 billion. Notably, both fuel imports and fuel exports rose sharply with the EU and non-EU countries alike during the quarter; ONS attributes this to rising oil prices resulting from the ongoing conflict in the Middle East, which has continued to disrupt fuel shipments moving through the Strait of Hormuz.
vi. Housing Market
The UK housing market was flat in July 2026, following a 0.2% rise in June, with prices unchanged on the month (0.0%). According to data published by Lloyds Bank, the average house price fell by £143 compared with the previous month, to £299,253 (June: £299,396). House prices have thus maintained the stability seen over the past two years, moving within a narrow range and standing just 0.5% above their November 2024 level.
Annual house price growth slowed to 0.1%, the weakest rate of annual house price inflation since November 2023. Amanda Bryden, Head of Mortgages at Lloyds, noted that prices have remained stable even as buyers and sellers have faced a more uncertain economic backdrop this year. Bryden said affordability remains a challenge for many would-be buyers, and that following recent events in the Middle East, mortgage rates have edged higher again after easing earlier in the summer.
Average Housing Prices
Regionally, Northern Ireland again recorded the UK's strongest annual price growth, with prices up 7.4% year-on-year, taking the average property price to £231,131. Scotland saw annual growth of 3.6% to £223,246, while Wales recorded growth of 1.6% to £231,458. Within England, the strongest growth remained concentrated in the northern regions, with the North East up 2.8% to £182,488 and the North West up 2.1% to £247,836.
By contrast, the weakest regional performance was seen in southern England. The South East saw prices fall 2.0% year-on-year to £381,146, while Greater London recorded a 1.3% decline to £533,930. This picture points to a continued divergence in regional price performance across the country.
On housing transaction volumes, HMRC data show that seasonally adjusted residential transactions rose by 0.2% to 98,700 in June 2026; on a non-seasonally adjusted basis, transactions rose by 11.4% on the month. On a three-month basis (April to June), transaction volumes were 1.5% lower than in the preceding three months, but 2.5% higher than in June 2025. Bank of England data show mortgage approvals for house purchase rose by 2.9% month-on-month in June, to 58,200; however, this figure remained 10.0% lower than a year earlier, indicating that demand remains below last year's level.
According to the Royal Institution of Chartered Surveyors' (RICS) June 2026 Residential Market Survey, new buyer enquiries remained weak but improved slightly, with the headline net balance moving to -29% from -34% in each of the previous two surveys. Newly agreed sales were also marginally less negative, at a net balance of -32%, compared with -35% previously. New instructions to sell weakened further, with the net balance falling to -23% from -10%, pointing to a reduced flow of fresh listings coming onto the market. Overall, the survey suggests that housing market activity remains subdued, although the pace of deterioration in demand and sales appears to be moderating.
Lloyds expects market activity and house prices to remain relatively stable for the remainder of the year. According to the bank, developments over the coming months will largely be shaped by how mortgage rates respond to the inflation outlook and by the overall level of household confidence. Continued volatility in borrowing costs, and the impact of Middle East-related uncertainty on mortgage pricing, stand out as the main risks to monitor in the housing market in the months ahead.
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