UK GDP growth eases to 0.4% in Q2 but services keep economy resilient

Britain’s economy expanded at a slower clip in the second quarter of 2026, with gross domestic product rising 0.4% – down from the 0.6% recorded in the first Three months – but the underlying strength of the services sector helped blunt the impact of the Iran war and domestic cost‑of‑living pressures.

The Office for National Statistics confirmed the figures in its latest release, noting that overall production was unchanged while “the economy remained relatively robust after a strong start to 2026” (Three.fm). For policy‑makers and businesses, the modest slowdown raises fresh questions about where growth will come from as the fiscal year rolls on.

Service‑led resilience

Liz McKeown, the ONS’s director of economic statistics, highlighted the role of services, singling out “computer programming and advertising” as sectors that “continued to perform strongly”. The buoyancy of these high‑value activities offset weakness elsewhere, especially in wholesale, which she described as “a notable area of weakness”.

Rob Wood, chief economist at Pantheon Macroeconomics, dismissed the notion that the slowdown reflected a consumer belt‑tightening linked to higher fuel costs from the Middle‑East conflict. He called it “a mechanical unwind” of front‑loaded spending at the start of the year, suggesting that the quarterly dip is more a timing effect than a sign of waning demand.

Production figures showed a mixed picture: pharmaceutical and computer manufacturing posted gains, while power generation and sewerage saw declines. The net result left overall output flat, reinforcing the view that growth is now being driven more by services than by traditional manufacturing.

On a month‑by‑month basis, June surprised analysts with a 0.3% rise in GDP, beating the “0%” forecast from the Reuters poll. McKeown attributed the surprise in part to “sunny weather and sport”, with the World Cup kicking off that month and injecting a short‑term lift to hospitality and related services.

"I know people are worried about the impact of the conflict in the Middle East on their cost of living, which has been too high for too long and it has added pressure on British businesses.

This is an active, hands‑on government, putting British interests first – giving breathing space to those feeling the strain, making our country more resilient and bringing hope back."

John Healey, chancellor, via Three.fm

"Our economy is struggling because Labour have no plan for growth. Labour have mismanaged the economy with their tax and borrowing spree, leaving it weak and vulnerable to the effects of shocks like the Iran War. Yet Andy Burnball is gearing up to tax and borrow even more, doubling down on those failures."

Sir Mel Stride, shadow chancellor, via Three.fm

The divergent narratives reflect the broader partisan debate over fiscal policy and the appropriate response to external shocks. While the governing Labour team points to the services‑driven resilience as evidence of a “hands‑on” approach, the Conservative opposition blames what it calls a “tax and borrowing spree” for leaving the economy exposed.

International context: US inflation and the same shocks

Across the Atlantic, the United States is grappling with its own fallout from the Iran war and a surge in AI investment. The Labor Department reported that consumer prices rose 3.4% in July from a year earlier, a slight dip from 3.5% in June, signalling a modest easing of inflationary pressure (HuffPost).

Dan North, senior economist at Allianz Trade North America, said the cooling inflation “makes the Fed’s decision a little bit easier” as price growth creeps down.

Key drivers of Q2 growth – at a glance

• Quarterly GDP growth: 0.4% (April‑June) vs 0.6% (January‑March).
• Monthly surprise: 0.3% expansion in June, beating the 0% forecast.
• Sectoral performance: Services – especially computer programming and advertising – grew; wholesale weakened; manufacturing mixed.
• External influences: Iran war, World Cup, sunny weather.
• Political commentary: Labour chancellor emphasizes resilience; Conservative shadow chancellor blames fiscal policy.

What to watch next

Analysts will be watching several upcoming events for clues on whether the services‑led momentum can sustain a higher growth rate:

• Release of the ONS’s October‑November GDP estimate, due early next year, which will reveal whether the June boost was a one‑off.
• Policy announcements from the Treasury on fiscal support for households coping with higher energy costs.
• Decisions by the Bank of England on interest‑rate settings as inflation pressures evolve in line with global commodity trends.
• Developments in the Iran conflict that could affect fuel imports and transport costs.
• US Federal Reserve minutes, expected later this month, that may signal shifts in global monetary policy affecting the pound.

For businesses, the message is clear: while the headline growth rate has softened, the engine of services remains strong enough to keep the economy from a sharper slowdown. How policymakers harness that resilience – through targeted support or broader fiscal stimulus – will shape Britain’s trajectory as the year progresses.