UK economy enjoys resilient second quarter

UK GDP grew by 0.4% in the second quarter of 2026 (see Chart 1); down from 0.6% in the previous quarter, but still strong by recent standards. This apparent resilience comes with an asterisk.

Much of the second quarter's strength was driven by temporary factors, including Iran war-driven stockpiling by businesses, unusually warm weather and the World Cup, rather than genuine momentum. Monthly GDP is estimated to have grown by 0.3% in June, following no growth in May.

Professional, scientific and technical activities were up 1.7%, driven by growth in:

• advertising and market research (4.3%);
• scientific research and development (3.9%); and
• legal activities (2.5%). 

However, the construction sector increased by 0.3%, while industrial production output showed no growth.

On the expenditure side, business investment is estimated to have increased by 1.7% in Q2 and is now estimated to be 0.8% higher than it was in the same quarter a year ago.

UK labour market stuck in ‘low-churn limbo’

UK’s unemployment rate held at 4.9% in the three months to June 2026. The number of job vacancies, a key indicator of labour demand, fell by 0.8% to 707,000 in the three months to July 2026. Total vacancies are now 10.3% below their pre-Covid level.

By business size, the largest quarterly decrease in vacancies was in micro businesses (1 to 9 employees) (see Chart 3). These figures suggest that the UK's labour market remains stuck in a low-churn limbo. Employers are reluctant to hire, fire or offer bigger pay rises as they grapple with rising costs, intensifying global headwinds and heightened policy uncertainty.

UK inflation reaccelerates

Official figures suggest an increase in UK inflation from 2.6% in June to 2.9% in July – the highest rate since March and above the Bank of England’s 2% target. The sudden uptick on the headline rate was driven by July’s increase in Ofgem's energy price cap.

The regulator raised the price cap on gas and electricity costs by 13%, which increased the average annual household bill by £221. Gas prices rose by 14.7% in July, the biggest increase since October 2022.

This is unlikely to be a one-off; drought-related increases in food prices, rising fuel prices and surging energy costs raise the prospect of inflation topping 3.5% later this year, especially if disruption in the Strait of Hormuz persists.

UK interest rates on a knife edge

At their latest meeting, the Bank of England held interest rates at 3.75%, with members of the Monetary Policy Committee (MPC) voting six-three in favour of this outcome. The vote split was tighter than previous votes and confirms a hawkish shift within the committee. Inflation worries are outweighing concerns over the economy, but the committee has kept a September rate rise on the table. Therefore, interest rates remain on a knife edge.

Policy may not change for the rest of the year, with rate-setters relying on tough talk rather than higher rates to contain inflation. But the longer the Iran conflict persists, the greater the risk that the committee's patience will finally snap.

Implications for accountants, business owners and the economy

Overall, these figures point to a more challenging second half of the year for the UK economy. The squeeze on household incomes from higher inflation and energy costs will increasingly stifle growth, particularly if pre-Budget speculation further dampens confidence.

Expected weaker GDP growth and higher inflation could make the Chancellor's Budget balancing act more challenging by increasing fiscal pressures and limiting his policy options at a time of heightened financial market volatility.