UK Economy Returns to Growth Amid Worsening Business Confidence

The UK economy has returned to growth after a decline in April, but the outlook is increasingly difficult as business confidence drops to near four-year low. The services sector grew by 0.3% in May, driven by professional, scientific and technical activities, health and social work, and administrative and support services.

The overall uptick in May is unlikely to have prevented slowing GDP growth across Q2, with the intensifying squeeze on incomes from elevated energy costs likely to hit June GDP. The World Cup boost to retail and hospitality may have some impact, but it's not enough to offset the economic downturn.

UK business confidence has fallen to a near four-year low, according to ICAEW's Business Confidence Monitor (BCM). The index stood at -14.6 in Q2 2026, down from -1.1 in the previous quarter and reflecting weaker expected sales activity and rising costs pressures.

The largest upward pressure on UK inflation came from motor fuels, which rose by 24.6% in May. However, food price inflation slowed to 2.2%, its slowest rate since December 2024. The prospect of inflation peaking below 4% is becoming increasingly plausible if oil prices continue to weaken.

Businesses worry about geopolitical risks and labour costs, with 65% citing the former as an issue in ICAEW's BCM report. Labour costs were the second most cited challenge, followed by energy costs. The share of businesses citing transport worries nearly doubled from 11% to 20%, the highest for more than two years.

The UK jobs market is looking increasingly fragile, with unemployment holding steady at 4.9%. Pay growth in the private sector slowed to 2.9%, its lowest rate since October 2020. The UK economy may be as good as it gets for the new Prime Minister, with a difficult second half of the year ahead.