UK growth slows as Iran war costs bite – what the data reveals

The morning’s headlines carry a quiet tension. Britain’s economy is still growing, but the pace has halved since January, and the reasons are written in the fine print of the latest ONS release. Behind the steady 0.4 % expansion in the three months to June lies a story of resilience tested by geopolitics, of sectors that prospered while others stumbled, and of a government that must now decide how much of the slowdown is temporary—and how much is structural.

The slowdown: what the numbers say

The Office for National Statistics reported this morning that GDP rose by 0.4 % in the second quarter, down from 0.6 % in the first. The figure matches City forecasts, but the composition tells a more nuanced tale. Services, which account for 80 % of the economy, grew by 0.5 %, buoyed by the World Cup and a spell of warm weather that lifted retail and hospitality. Manufacturing, however, contracted by 0.3 %, its first decline in a year, while construction fell by 0.7 %, the steepest drop since the winter storms of 2024.

The ONS explicitly linked the slowdown to “disruptions from the Iran war,” a phrase that appears twice in the statistical bulletin. Businesses in chemicals, logistics and defence supply chains cited higher shipping costs, delayed deliveries and uncertainty over future contracts. The war, which entered its third year in April, has rerouted tanker traffic away from the Strait of Hormuz, adding 10–15 days to voyages between the Gulf and European ports. For UK manufacturers reliant on Middle Eastern petrochemicals, the effect has been a squeeze on margins and a reluctance to invest.

Trade and defence: the hidden drags

Trade data released alongside the GDP figures show exports falling by 1.2 % in the quarter, the largest drop since the post-Brexit customs checks of 2021. Imports rose by 0.8 %, widening the trade deficit to £12.3 bn, its highest level in two years. The ONS noted that “defence-related imports” surged by 18 % as the UK ramped up purchases of drones, munitions and cyber-defence systems from US and European suppliers. While these imports boosted GDP through higher government spending, they also reflect a shift in priorities that may not be sustainable: the Ministry of Defence’s budget is now projected to rise from 2.3 % to 2.5 % of GDP by 2027, a pledge made by Chancellor Rachel Reeves in last month’s spending review.

The trade imbalance is not uniform. Exports of financial services to Asia grew by 4.1 %, and pharmaceutical shipments to Africa rose by 6.3 %, suggesting that some sectors are finding new markets. But the overall picture is one of an economy that is trading less with its traditional partners and more with those that can offer security guarantees—at a cost.

The political tightrope

The slowdown arrives at a delicate moment for Keir Starmer’s government. The Prime Minister has staked his economic credibility on a growth plan that relies on private investment in green energy and advanced manufacturing. Yet the ONS data shows business investment flatlining at 0.1 % growth, well below the 0.7 % average of the past decade. In a briefing this morning, Treasury officials attributed the stagnation to “heightened uncertainty” over both the Iran conflict and the upcoming US election, which could reshape transatlantic trade rules.

Starmer’s response has been to emphasise resilience. “The fundamentals of the UK economy remain strong,” he told reporters outside Downing Street, pointing to record employment and wage growth outpacing inflation for the sixth consecutive month. But the OBR, which will publish its next forecast in September, is expected to revise down its 2026 growth projection from 1.8 % to 1.4 %. That would leave the government with less fiscal headroom than anticipated, complicating plans to increase spending on the NHS and education without raising taxes.

Japan’s protest and Taiwan’s cyber warning: the geopolitical backdrop

While the UK’s economic data dominated headlines, two other stories this morning underscored the global forces shaping the country’s prospects. Japan formally protested against Vladimir Putin’s visit to the disputed Kuril Islands, a move that risks further straining relations with Moscow at a time when the UK is seeking to deepen defence ties with Tokyo. The Foreign Office issued a statement of support for Japan’s position, but stopped short of imposing sanctions, reflecting a cautious approach to escalation.

Meanwhile, Taiwan reported what it called an “abnormal” AI-assisted cyber-attack on government agencies last month, the first such incident to be publicly attributed to artificial intelligence. The Ministry of Digital Affairs said the attack, which originated from overseas, used machine-learning algorithms to adapt its tactics in real time, evading traditional cyber-defences. While Taiwan did not name a perpetrator, the timing—coinciding with heightened tensions over semiconductor supply chains—has raised concerns in Whitehall, where officials are already grappling with a surge in AI-driven fraud targeting UK businesses.

The week ahead: what to watch

With A-level results due tomorrow, attention will shift to the education sector, where universities are bracing for a 10 % drop in international student enrolments following stricter visa rules introduced in May. The shortfall is expected to widen funding gaps at several Russell Group institutions, adding pressure on the government to revisit its immigration policy.

In Westminster, the focus will return to the Economic Activity of Public Bodies Bill, which seeks to ban public sector pension funds from divesting from defence and fossil fuel companies. The bill, which passed its second reading last week, has split the Labour Party, with 30 backbenchers threatening to rebel. A vote on amendments is scheduled for Monday, and the outcome could signal how much room Starmer has to manoeuvre on his broader economic agenda.

The data released today is not a crisis, but it is a warning. The UK economy is still growing, but the engines of that growth are shifting—from trade to defence, from consumption to caution. The question for the government, and for businesses, is whether this slowdown is a pause or a pivot. The answer will shape the next decade as much as the last.