UK economy returns to growth in May despite Iran pressures – with Andy Burnham warned over what’s next
The UK economy returned to growth in May, but the fallout from the Iran war continues to hamper businesses and consumers; which leads one expert to note that Andy Burnham will inherit an economy “that is not as far behind the G7 as many think”; but others warn of worse things ahead.
Rising energy costs and disruptions in supply chains are two of the biggest challenges to further economic growth; Office for National Statistics (ONS) data shows gross domestic product (GDP) rose by 0.1 per cent in May, following a 0.1 per cent contraction in April.
The lackluster growth in May followed growth of 0.3 per cent in the all-important services sector, which was partly offset by declines in manufacturing of 0.5 per cent and construction of 0.8 per cent, according to the ONS.
Growth declines sharply after a much better start to the year than expected; The ONS recorded growth of 0.3 per cent in March before contracting in April, the first decline in eight months, seen as a sign that the Iran war was beginning to take hold.
GDP rose 0.7 per cent in the three months to May, following an upwardly revised 0.8 per cent growth in the three months to April.
However, due to the retrospective nature of the data, concerns are now based on renewed hostilities in the Middle East, which could further impact the inflation outlook for the remainder of 2026.
“The economy grew by 0.1 per cent in May and has continued to grow in the last three months, showing resilience that should be welcomed,” said Scottish Friendly savings expert Kevin Brown.
“But while growth on paper may mean little to many UK households, concerns about volatile energy prices, inflation and daily bills continue to overshadow the wider picture.
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“The real test is whether this momentum can be sustained long enough to improve living standards and give people greater confidence to spend, save and plan ahead.”
Despite this, incoming prime minister Andy Burnham will inherit an economy that grew more than some expected throughout the year and inflation data that show remarkable consumer resilience given this month’s figures.
“The quarterly growth rate currently stands at a very strong 0.8 per cent. And the UK is likely to continue to sit at or near the top of the G7 league table when it comes to GDP growth in the second quarter of the year. In short, Keir Starmer is handing over the economy to his successor on a much better footing,” said Sanjay Raja, UK Chief Economist at Deutsche Bank.
“Looking ahead, we expect the momentum to fade somewhat. In fact, the energy crunch in Iran will eventually impact households and businesses, constraining spending and investment. The ongoing geopolitical uncertainty around the Strait of Hormuz will not help either. And the UK’s torrid GDP growth to start the year will of course also ease somewhat.”
“But two things will be true as we head into the summer. Firstly, despite yesterday’s heartbreaking defeat at the World Cup, the UK will likely see a temporary boost to GDP in July given the extended trading hours. Secondly, the UK is not a G7 laggard as many think.
“The latter will be important for the new prime minister, as he is likely to offset some of the potential decline in the economic outlook as part of the OBR’s fiscal update in the autumn.”
However, that optimism was not echoed quarter after quarter, as Scott Gardner, chief investment strategist at JP Morgan Personal Investing, felt newcomer Burnham was given a “tough job.”
“The UK economy grew in May, beating expectations and showing signs of resilience despite an uncertain geopolitical environment. While this is positive, the wider picture still points to a fragile economy where high energy costs continue to put pressure on businesses and consumers,” he said.
“With momentum still difficult to sustain and the situation in Iran remaining uncertain, this reading underscores the economic challenge facing the next prime minister. They will be handed a tough hand as inflation remains above target and the conflict in Iran continues to hinder growth.”
The conflict in the Middle East has been flagged as affecting activity by businesses in a number of sectors, including some manufacturing industries, hospitality firms, travel agencies and entertainment companies, the ONS said.
According to the ONS, “The common theme of comments received in the monthly business survey was disruptions to global supply chains due to the conflict in Iran.”
Pantheon Macroeconomics experts said May’s increase put the economy on track for 0.3 percent growth overall in the second quarter, up from 0.6 percent growth in the first three months.
However, with the ongoing conflicts in the Middle East for nearly five months and the major breakdown of the US-Iran peace agreement, rising fuel and energy costs are expected to affect growth during the year.
Fergus Jimenez-England, an associate economist at the National Institute for Economic and Social Research (Niesr), said the new prime minister should make economic stability a top priority.
He said: “Today’s data confirms that growth remains fragile, with both the manufacturing and construction sectors in decline and services keeping the economy afloat.
“The growth outlook is further threatened by volatile energy costs, which will likely negatively impact economic activity in the near future.
“With energy prices rising once again, all eyes are now on the new prime minister who will provide much-needed stability.”
A Treasury spokesman said: “We have the right economic plan in place that puts the UK in a much stronger position than two years ago, with the fastest growth in the G7 in the first quarter, and the OECD (Organisation for Economic Co-operation and Development) agrees we have restored stability.”
Rob Morgan, chief investment analyst at Charles Stanley Direct, looked at the Budget later this year and predicted more taxes were one of the few real options available to the new Labor leader and future chancellor.
“The prospect of a major fiscal event under a new government adds another layer of uncertainty. A Burnham government, inheriting weak growth and strained public finances, has only limited options to balance the country’s books in the short term: higher taxes, spending restraint, more borrowing or some combination. Households may become increasingly cautious if they fear future tax rises will be the meal of the day,” he said.
Graham Nicoll, financial planner at NCL Wealth Partners, added that the most important factor was whether households and businesses were starting to feel more secure, rather than economic numbers remaining almost flat from month to month.
“Services stimulate the economy, but weakness in key sectors raises concerns about investment, productivity and business confidence,” he said. “For the average person this is unlikely to feel like progress. This level of GDP growth does little to improve living standards, generate significant wage growth or ease financial pressures.
“The true measure of the recovery will be not just whether the economy avoids contraction, but whether households and businesses begin to feel safer.”
Meanwhile, the Trades Union Congress has called on Andy Burnham to raise living standards above all else. “Donald Trump’s illegal war has sent energy prices through the roof and follows years of skyrocketing bills,” TUC general secretary Paul Nowak said. “Therefore, the new prime minister urgently needs to show working people that this government is on their side by making living standards his number one priority.”
Additional reporting by PA
