UK GDP Set for 0.4% Q2 Growth Despite Iran War Disruption

For market participants, the upcoming GDP print is more than a backward-looking statistic—it will set the tone for sterling, gilt yields, and FTSE 100 sentiment. With the Bank of England watching closely, a 0.4% growth figure may reduce pressure for further easing, but a weak June monthly reading could reignite rate-cut bets. This briefing breaks down the numbers and what they mean for your portfolio.

The UK economy is poised to record a second consecutive quarter of expansion in the second quarter of 2026, with economists forecasting a 0.4% rise in gross domestic product, according to consensus estimates ahead of the Office for National Statistics (ONS) release on Thursday, August 13. This would follow a robust 0.6% increase in the first three months of the year, signaling that the broader economy is absorbing the shock of the Iran war and its attendant supply chain disruptions and price pressures. The resilience largely stems from a steady services sector, particularly professional services and R&D, which powered a 0.1% month-on-month GDP gain in May, alongside a pre-emptive stockpiling drive by manufacturers bracing for shortages. Yet beneath the aggregate growth picture, cracks are appearing: June is expected to show a 0.1% contraction, driven by a sharp fall in construction activity and stagnation in services and industrial production, while heatwaves and geopolitical uncertainty weigh on hospitality and consumer spending.

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However, Thomas Pugh, chief economist at RSM UK, warns that hospitality was already losing momentum even as the FIFA World Cup kicked off in July, suggesting that the feelgood factor from major events is not translating into footfall.

The services sector, which accounts for roughly 80% of UK output, remains the engine of growth. May's performance was buoyed by business-to-business activities in consulting, legal services, and scientific research, offsetting a softening in consumer-facing segments. However, Thomas Pugh, chief economist at RSM UK, warns that hospitality was already losing momentum even as the FIFA World Cup kicked off in July, suggesting that the feelgood factor from major events is not translating into footfall. With the tournament extending into August and England reaching the semi-finals, there is some hope of a modest spending boost in July, but the headwinds from elevated energy costs and lingering inflation are curbing household budgets.

On the industrial front, the Iran conflict has triggered a classic stockpiling effect. Factories accelerated orders for raw materials and components to hedge against potential supply interruptions and price spikes, artificially inflating production and import figures earlier in the quarter. This temporary surge is likely to unwind in the second half, leaving the manufacturing sector exposed to a sharper correction. Construction has already shown vulnerability; monthly output is projected to have contracted in June due to labour shortages and higher material costs, a double blow that could persist if hostilities in the Strait of Hormuz keep shipping routes volatile.

The political backdrop adds uncertainty. The current government has faced criticism over its handling of national security and economic stability, and while broad fiscal policy remains supportive, the lack of clarity on trade relationships and defence spending is weighing on business confidence. The ONS's quarterly breakdown will thus be closely scrutinized by investors and the Bank of England's Monetary Policy Committee as it weighs the pace of interest rate adjustments. A 0.4% growth rate, while positive, is markedly below pre-war trend levels and may be insufficient to deter the BoE from considering further stimulus or rate cuts if inflation continues to ease.