UK Growth Outlook Brightens After US-Iran Truce Lowers Oil Costs

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The US-Iran truce has sharply improved UK growth forecasts, with Bloomberg Economics now projecting 1.2% expansion in 2026, up from 0.8%. The deal, which ended Iran’s closure of the Strait of Hormuz, has driven oil prices below $80 a barrel after they spiked above $100 in late February. Inflation is now expected to stabilize at 3% by year-end, down from a prior forecast of 3.5%, easing pressure on the Bank of England. With inflation receding, the Bank of England can hold rates at 3.75% as long as oil prices stay stable, and a final cut to 3.5% is now expected in Q2 2027. Brent crude hovering just above $70 a barrel could shift the discussion toward further easing. However, growth is still projected to slow to 0.2% per quarter for the rest of 2025, down from 0.6% in Q1, though the cooling will be less severe than previously feared. The biggest domestic risk remains incoming Prime Minister Andy Burnham, whose spending plans on social housing and cost-of-living support could spook fiscal markets. While lower energy costs provide a buffer, political uncertainty overshadows the outlook. Bloomberg Economics warns that growth will still slow in the second half, but the de-escalation in the Middle East has removed a major headwind. What to watch next: Whether Brent crude can stay below $80 a barrel and if Burnham’s fiscal agenda triggers market volatility, potentially forcing the Bank of England to adjust its rate path.

Key Takeaways

UK 2026 growth forecast raised to 1.2% from 0.8% after US-Iran truce lowered oil prices.
Inflation expected to stabilize at 3%, below the 3.5% previously forecast.
Bank of England likely to hold rates at 3.75%, with a final cut to 3.5% in Q2 2027.
Incoming PM Andy Burnham’s spending plans pose the biggest domestic risk to the outlook.

Insights & Analysis

The truce removes a major supply-side shock, but the UK’s structural growth remains below trend, highlighting reliance on external factors for recovery.
Burnham’s fiscal expansion could reignite inflation or spook bond markets, forcing the BoE to delay easing despite lower oil prices.

Original source

https://www.bloomberg.com/news/articles/2026-06-29/uk-growth-outlook-brightens-after-us-iran-truce-lowers-oil-costs?srnd=phx-economics-v2

Sentiment

Summary

**The US-Iran truce has sharply improved UK growth forecasts, with Bloomberg Economics now projecting 1.2% expansion in 2026, up from 0.8%.** The deal, which ended Iran’s closure of the Strait of Hormuz, has driven oil prices below $80 a barrel after they spiked above $100 in late February. Inflation is now expected to stabilize at 3% by year-end, down from a prior forecast of 3.5%, easing pressure on the Bank of England.

**With inflation receding, the Bank of England can hold rates at 3.75% as long as oil prices stay stable, and a final cut to 3.5% is now expected in Q2 2027.** Brent crude hovering just above $70 a barrel could shift the discussion toward further easing. However, growth is still projected to slow to 0.2% per quarter for the rest of 2025, down from 0.6% in Q1, though the cooling will be less severe than previously feared.

**The biggest domestic risk remains incoming Prime Minister Andy Burnham, whose spending plans on social housing and cost-of-living support could spook fiscal markets.** While lower energy costs provide a buffer, political uncertainty overshadows the outlook. Bloomberg Economics warns that growth will still slow in the second half, but the de-escalation in the Middle East has removed a major headwind.

**What to watch next:** Whether Brent crude can stay below $80 a barrel and if Burnham’s fiscal agenda triggers market volatility, potentially forcing the Bank of England to adjust its rate path.

Key Takeaways

Insights

Teks Asli (SEO)

Full article body

The fall in global oil prices is “unequivocally good news” for Britain’s economy, Bloomberg Economics said as it lifted growth forecasts for this year.

UK output will expand 1.2% in 2026, it said, up from a forecast of 0.8% before the US and Iran struck an interim peace deal. The latest official growth figures for the three months to March are due to be published on Tuesday morning.

Inflation is now expected to stabilize at 3%, below the 3.5% that Dan Hanson’s team had been projecting by the year end.

With the threat from inflation receding, the Bank of England will be able to hold interest rates at 3.75% so long as oil prices do not spike again, the economists said. If Brent crude remains at current levels of just above $70 a barrel “the discussion could quickly flip to the timing of further easing.”

Bloomberg Economics sees “a final cut” to 3.5% in the second quarter of 2027, with inflation averaging 2.3% across next year.

The conflict in the Middle East that began on Feb. 28 derailed growth across the world when Iran closed the Strait of Hormuz, causing a bottleneck in oil supplies. Prices rose above $100 a barrel, raising fears of another inflation shock and hit to growth — particularly in the UK.

Recent de-escalation has brought prices below $80 a barrel despite skirmishes that are testing the deal agreed between Iran and the US earlier this month. Gas prices have also fallen.

Bloomberg Economics said the UK economy is likely to grow at 0.2% over each of the remaining quarters of this year, down from 0.6% in the first three months and still lower than its 0.3% estimate of trend growth.

While falling oil and gas prices are promising, the UK faces another risk in the incoming Prime Minister Andy Burnham, who has promised more social housing and help for families with the cost of living at a time when markets are nervous about the UK’s fiscal plans. Burnham is expected to take office in mid-July.

“Growth is still likely to slow in the second half of the year but the cooling will be less marked than it otherwise would have been,” said Hanson, Matt Bunny and Ana Andrade, economists at Bloomberg Economics. “Domestically, politics remains the biggest uncertainty.”

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