War and tax: How the UK economy could get knocked off course

The UK economy has surprised many economists with strong growth, expanding by about one percent in the first half of 2026, making it the fastest-growing economy in the G7. The improvement in GDP per capita is particularly noteworthy, as it has only increased by one percent in the past 20 years. However, the strong growth has largely been driven by investment in the technology sector, particularly AI-related services, despite concerns from experts like the IMF's Kristalina Georgieva and the Bank of England's deputy governor Sarah Breeden.

Despite the positive signs, the UK economy faces potential challenges in the coming months. Business investment has been high, but it has primarily come from professional services firms and other sectors investing in AI. Production has been flat in the second quarter due to issues in the energy sector, particularly electricity and gas supply. Construction output is also still about two percent lower than it was a year ago.

The Office for National Statistics (ONS) is facing criticism for its revised GDP growth figures, which have become more volatile and inconsistent. Some analysts believe these fluctuations are temporary, caused by factors like the World Cup and sunny weather. However, the next six months could bring significant challenges. The outcome of Middle East peace negotiations and trade agreements, as well as Chancellor John Healey's first Budget, will likely determine the UK economy's fate.

If oil and gas supplies from the Strait of Hormuz are disrupted, the UK economy could slide into a recession. The Bank of England may also need to raise interest rates, tightening monetary flows and weakening demand. Treasury advisers have warned that GDP growth could reach just 0.3 percent in 2027 if the Strait remains blocked, and inflation could peak at 4.3 percent.

With the Budget just two months away, the government and opposition parties are already discussing potential tax rises and spending cuts totaling up to £25 billion by 2030. The impact of these measures on growth and government income is a subject of ongoing debate, with business executives and economists offering various opinions on the potential effects of tax changes and new wealth levy ideas.