U.K. growth faces Iran war risk despite leading G7 performance
Britain’s economy expanded strongly in the first half, but higher gas prices and Hormuz disruption could sharply weaken growth.
By Sofia Marchetti · Columnist
· 3 min read
The U.K. growth Iran war story is a split-screen for investors: Britain posted strong first-half economic growth, yet its exposure to imported energy leaves that momentum vulnerable if disruption around the Strait of Hormuz lasts. The immediate risk is higher household bills and inflation, which can reduce consumers’ spending power and make it harder for the economy to keep expanding.
Official figures cited by CNBC show U.K. gross domestic product rose 0.6% in the first quarter of 2026 and 0.4% in the second. Business investment increased 1.7% in the second quarter, against the 0.5% fall expected by economists in a Reuters poll.
Deutsche Bank’s chief U.K. economist, Sanjay Raja, said those results put Britain on course to lead growth among G7 countries for a second consecutive quarter. He calculated that the first-half pace equated to a 2% annualized rate. That is a measure of the growth rate if the period’s pace continued for a full year, rather than a prediction that it will do so.
Why is the U.K. vulnerable to the Iran war?
Britain imports oil and gas, and gas plays an unusually large role in its electricity system relative to European peers. Reuters reported that gas prices generally set British power prices, and that gas had risen faster than oil since the war began. A prolonged supply disruption can therefore flow from wholesale energy markets into electricity and heating costs, then into broader inflation.
Higher inflation also squeezes real household income, meaning what wages can buy after price increases. It can curb consumer spending and pressure the Bank of England to keep borrowing costs high or raise them. Reuters said Britain already had the G7’s highest borrowing costs while unemployment was rising, so any rate increases would add to pressure on borrowers.
The U.K. energy price cap may soften the initial effect on inflation, Reuters reported. But the same report said budget constraints and pressure in the government bond market limit the government’s room to help households and businesses absorb a sustained shock.
What could persistent Hormuz disruption mean for U.K. growth?
The most severe number in circulation is a scenario, not a forecast. CNBC reported that Bloomberg had said Treasury officials presented worst-case modelling under which U.K. growth would slow to 0.3% in 2027 if disruption in the Strait of Hormuz persisted. CNBC said the Treasury did not respond to its request for comment.
That uncertainty matters. T. Rowe Price economist Tomasz Wieladek told CNBC that the impression the Middle East conflict had left Britain untouched was likely overly optimistic, noting that reported growth often runs stronger in the first half than later in the year. Pictet Asset Management’s Shaniel Ramjee said the recent expansion was concentrated in services, with warm weather helping, while construction and industrial production were down from a year earlier.
Britain is not alone in its exposure. Reuters identified Japan’s dependence on Middle Eastern oil shipped through Hormuz, alongside Germany’s industry-heavy economy and Italy’s manufacturing and energy needs, as separate vulnerabilities. For the U.K., the issue is whether solid services-led growth can outlast an energy shock that reaches households through power prices and borrowing costs.
This story draws on original reporting from CNBC.
