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 of the Iran war continues to hamper businesses and consumers, leading one expert to note Andy Burnham will inherit an economy which is “not the G7 laggard that many regard it” as - but others cautioning worse lies ahead.

Rising energy costs and disruption to supply chains are two of the biggest issues to any further economic expansion, with the Office for National Statistics (ONS) data showing gross domestic product rose (GDP) by 0.1 per cent in May, following a 0.1 per cent contraction in April.

The meagre growth in May came after expansion of 0.3 per cent in the all-important services sector, which was partly offset by falls of 0.5 per cent in production and 0.8 per cent in construction, according to the ONS.

Growth has been pulling back sharply after a much better than expected start to the year, with the ONS recording growth of 0.3 per cent in March before the contraction in April, which was the first fall for eight months in what was seen as a sign that the Iran war was beginning to take its toll.

In the three months to May, GDP rose 0.7 per cent after upwardly revised growth of 0.8 per cent in the three months to April.

However, with the data being backwards-looking concerns now rest on resumed hostilities in the Middle East which could further impact the inflation picture across the rest of 2026.

“The economy grew by 0.1 per cent in May and continued to expand over the latest three months, demonstrating a degree of resilience that should be welcomed,” said Kevin Brown, savings expert at Scottish Friendly.

“But growth on paper may mean little to many UK households while concerns about volatile energy prices, inflation and everyday bills continue to overshadow the wider picture.

“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 that, incoming prime minister Andy Burnham will inherit an economy which, across the year so far, has grown more than some expected it would, and - pending this month’s figures - inflation data which has shown remarkable consumer resilience.

“The three-month run rate now sits at a very strong 0.8 per cent. And it’s likely that the UK will 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 hands over the economy to his successor on much better footing,” said Sanjay Raja, Deutsche Bank’s chief UK Economist.

“Looking ahead, we expect momentum to dampen a bit. Indeed, the Iran energy squeeze will eventually catch up with households and businesses, constraining spending and investment. Lingering geopolitical uncertainty around the Strait of Hormuz won’t help either. And it’s likely that the UK’s torrid GDP growth to start the year will of course correct a bit.

“But two things will be true heading into the summer. First, despite a heartbreaking World Cup loss yesterday, the UK will very likely see a temporary bump in GDP over July given extended trading hours. And second, the UK is not the G7 laggard that many regard it to be.

“The latter will be important for the new prime minister, as it will likely offset some of the potential downgrade to the economic outlook coming as part of the OBR’s fiscal update in autumn.”

However, that optimism was not echoed in all quarters, with Scott Gardner, investment strategist at J.P. Morgan Personal Investing, feeling a “difficult hand” has been dealt to the incoming Burnham.

“The UK economy grew in May, beating expectations and showing signs of resilience despite an uncertain geopolitical environment. While this is a positive, the broader picture still points to a fragile economy with higher energy costs continuing to weigh on businesses and consumers,” he said.

“With momentum still proving difficult to sustain and the situation in Iran remaining uncertain, this reading highlights the economic challenge facing the next Prime Minister. They will inherit a difficult hand as inflation remains above-target and the Iran conflict continues to dampen growth.”

The ONS said the Middle East conflict had been flagged by businesses across a raft of sectors for having impacted activity, including some manufacturing industries, hospitality firms, travel agencies and entertainment companies.

“A common theme of comments received by the monthly business survey was disruption in global supply chains because of the conflict in Iran,” according to the ONS.

Experts at Pantheon Macroeconomics said the May increase puts the economy on track for growth of 0.3 per cent overall in the second quarter, down from growth of 0.6 per cent in the first three months.

But nearly five months of conflict in the Middle East, and with the US-Iran peace deal having largely fallen apart, is set to see soaring fuel and energy costs impact growth over the year.

Fergus Jimenez-England, an associate economist at the National Institute of Economic and Social Research (Niesr), said the incoming Prime Minister will need to make economic stability a top priority.

He said: “Today’s data confirm that growth remains fragile, with both production and construction sectors falling, and services keeping the economy afloat.

“The growth outlook is further threatened by volatile energy costs which will likely dampen economic activity in the near future.

“As energy prices climb once more, all eyes are now on the new Prime Minister to deliver much-needed stability.”

A Treasury spokesperson said: “We have the right economic plan which has put 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) agreeing that we have restored stability.”

Rob Morgan, chief investment analyst at Charles Stanley Direct, looked toward the Budget later this year and predicted more taxes were one of few real options available to the new Labour leader and his future chancellor.

“The prospect of a major fiscal event under a new government adds another layer of uncertainty. A Burnham government that inherits weak growth and stretched public finances has only a limited menu of options to balance the nation’s books in the short term: higher taxes, spending restraint, greater borrowing, or some combination. Households may become increasingly cautious if they fear future tax rises are the dish of the day," he said.

Graham Nicoll, financial planner at NCL Wealth Partners, added that the most important factor is if households and businesses start to feel more confident or not, rather than economic figures which read near-flat month to month.

“Services are keeping the economy moving, but the 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. GDP growth of this level does little to improve living standards, create significant wage growth or ease financial pressures.

“The real measure of recovery will be whether households and businesses start to feel more confident, not just whether the economy avoids contraction.”

The Trades Union Congress, meanwhile, urged Andy Burnham to raise living standards first and foremost. “Donald Trump’s illegal war has sent energy prices through the roof – and comes after years of bills increasing sharply,” said TUC general secretary Paul Nowak. “That’s why the new prime minister must urgently show working people that this government is on their side by making living standards his number one priority.”

Additional reporting by PA