UK economy grows 0.4% in Q2 as Iran conflict clouds outlook

The UK economy grew by 0.4% in the second quarter of the year, outpacing expectations and offering the government a rare piece of good news. But the relief is already proving short-lived, as the widening conflict in the Middle East — and Iran’s deepening involvement — threatens to drag on growth in the months ahead.

A solid quarter, but don’t celebrate yet

The Office for National Statistics confirmed the 0.4% expansion, up from 0.1% in the first quarter. Services led the charge, with consumer spending holding up better than many economists had predicted. Manufacturing also ticked upward, though only modestly.

Still, analysts were quick to pump the brakes on any triumphalism.

“These are decent numbers, but they reflect conditions before the latest spike in oil prices really fed through,” said one senior economist at a leading City forecasting firm. “The second half of the year is where this gets uncomfortable.”

Iran conflict rattles markets and energy prices

The escalation of hostilities involving Iran has sent crude oil prices surging past $97 a barrel in recent weeks, levels not seen since late 2022. That’s feeding directly into inflation forecasts that many had hoped were finally heading in the right direction. Petrol prices at the pump have already climbed roughly 6p per litre since June, and energy analysts don’t expect relief anytime soon.

For British households still nursing the wounds of the cost-of-living crisis, the timing is brutal. And for the Bank of England, which has been carefully threading the needle between cutting rates and keeping inflation in check, it creates a new headache nobody wanted.

Government claims credit, opposition isn’t buying it

Downing Street moved quickly to claim the GDP figures as validation of its economic strategy. A Treasury spokesperson said the growth showed the government’s plans were “delivering stability and laying the foundations for long-term prosperity.”

But opposition parties pushed back hard, pointing out that 0.4% growth remains well below the historical average and that living standards for most working people haven’t meaningfully recovered. The argument over who deserves credit — or blame — for Britain’s economic trajectory is only going to get louder as the next election approaches.

What comes next

The big question is whether the second quarter turns out to be a high-water mark for 2024. Most forecasters were already expecting growth to slow in Q3. With oil prices elevated, consumer confidence wobbling, and global trade routes under fresh pressure from Middle East tensions, that slowdown could come faster and hit harder than the spring projections assumed.

The Bank of England’s next rate decision, due in September, will be watched closely. A rate cut looked likely just weeks ago. Now, it’s far from certain. And for an economy that’s spent two years lurching from one crisis to the next, the margin for error remains uncomfortably thin.