14 August 2026: The economy is resilient when looked at through the lens of the war in Iran

The economy grew by 0.4% in Q2, official data has revealed, indicating that businesses and consumers have so far weathered the worst shocks of the war in Iran.

The growth figure from the Office for National Statistics was in line with analysts’ expectations but came alongside a surprise 0.3% boost in June.

May figures were revised down from 0.1% growth to flat.

City economists polled by Bloomberg had predicted that second-quarter growth would be 0.4%, while June data would show a 0.1% decline in total product value.

The services sector lifted the UK economy in the second quarter, growing by 0.5%. Production was flat, unchanged from the first quarter, while the construction sector struggled to gain momentum, expanding by 0.3%.

The figures suggest that businesses and consumers have been resilient in the face of price shocks stemming from the war in Iran, which has driven up oil prices and threatens to fuel inflation later this year.

However, analysts warned that the economy had benefited from one-off events such as the World Cup and a series of heatwaves, despite many working days being lost due to the high temperatures.

Economists recognised that the UK economy had proven to be “resilient”, but seasonal quirks are inflating activity in the first half of the year, with growth likely to lose some steam later in 2026.

There is a sense that economic growth is anaemic at best, but research shows that the economy has grown by an average of 0.5% per quarter over the past 25 years, although it has been between 0.1% and 0.6% over the past two years.

Britain's economy is showing the clearest signs yet of benefiting from the global artificial intelligence boom, with yesterday's data indicating rapid growth in related industries and a surge in investment in computer hardware. In the second quarter, the information and communications sector contributed almost half of that growth, more than any other industry.

Within the sector, the ONS said output in computer programming, consultancy, and related activities, which would include AI companies, grew by 3.7% in the quarter, following a 3.8% rise in the previous quarter.

Since becoming prime minister in July, Andy Burnham has made AI a Cabinet level priority. However, he appears to be often picking winners using hindsight.

His team has signalled a shift away from the previous Government's U.S. centric approach towards a greater emphasis on British ownership, "tech sovereignty", and protecting workers from disruption.

U.S. data has also pointed to AI's growing impact on the world's largest economy.

ONS investment data published yesterday offered further evidence of AI's impact.

Spending on plant and machinery across the economy has grown strongly this year, rising to £22.1 billion in the second quarter, within a whisker of a one-off record high hit in early 2022, caused by the timing of tax breaks.

Industrial production in the UK fell 0.2% MoM in June 2026, defying market expectations of a 0.1% increase, albeit easing from a 0.7% drop in the previous month.

Mining and quarrying output rebounded sharply (+5.1% vs -5.1% in May), supported by a strong recovery in crude petroleum and natural gas extraction (+6.2% vs -5.5%).

In addition, declines eased in water supply, sewerage, and waste management activities (-1.5% vs -3.1%).

On the other hand, manufacturing output remained under pressure (-0.5% vs -0.2%), weighed down primarily by production of basic pharmaceutical products and preparations (-5.1% vs 0.2%) and computer, electronic, and optical products (-0.9% vs 2.1%).

QoQ, industrial production showed no growth.

The pound was broadly stable to slightly softer yesterday, with a muted reaction to the UK’s stronger‑than‑expected GDP data. Across major pairs, GBP moved only a few pips from pre‑release levels, reflecting a market that saw the data as solid but not enough to shift Bank of England expectations.

"If you too like a good mystery, you like the U.S. economy," Federal Reserve Bank of Richmond President Thomas Barkin said yesterday, listing four he sees among the many.

He spoke before the Greenville Chamber of Commerce on 'The Mysterious U.S. Economy'. "Inflation is still above our target. Real incomes over the last year are down. Consumer sentiment has responded, with 2026 producing the three lowest monthly readings in the 70-plus-year history of the University of Michigan Surveys of Consumers," said the Federal Open Market Committee's alternate voting member."All the while, economic activity has kept rolling," he noted. "Real GDP growth has averaged 2.5% since 2023, above estimates of its longer-run trend. This year, when high fuel prices could've been the final straw, the economy barely blinked. Demand stayed healthy, and the unemployment rate fell."

Barkin attributes the economy's resilience to consumers. "Despite the turmoil, consumers have kept spending."

"Coming out of the pandemic, consumers now seem to have embraced 'YOLO' (You only live once)," said Barkin. "Additionally, the wealthy have built up even more wealth."

Regarding the strength of business investment amid challenging conditions, the Richmond Federal Reserve president cites artificial intelligence as the obvious reason.

"The levels of investment are hard to fathom,"... "And this investment seems impervious to the level of interest rates, the cost of building, or the amount of uncertainty. The demand appears relentless."

"Strong earnings make these investments defensible and affordable. Second-quarter earnings are up over 30%. If you include hyperscalers, they are up over 50%. Earnings forecasts for the coming quarter continue to be revised upward. Corporate leverage is down from where it was in 2020."

On the health of the labour market, Barkin said, "Unlike investment, firms are still on a hiring pause given their reluctance to risk over-hiring amid elevated uncertainty. Instead, they are keeping headcount flat or downsizing through attrition." This is fairly typical of the sector.

"And, while there's fear of AI-related layoffs, most AI use cases still don't show a clear path to headcount reduction, outside of computer programmers and customer service representatives."

It appears that rather than making comments or predictions regarding official data releases, Fed Chairman Kevin Warsh prefers to simply “play the hand he is dealt, while continuing to claim that his long-term goal is to bring inflation back closer to its 2% target.

A more hawkish perspective on inflation was expressed by Cleveland Fed President Beth Hammack yesterday. Hammack is a voting member of the FOMC this year but will lose her vote next year.

Hammack said the U.S. Federal Reserve should raise interest rates immediately. In her view, tighter monetary policy is needed to curb business activity and investment, and to curb inflation, which remains above the 2% target. Speaking at the Dayton Area Chamber of Commerce in Ohio, she said businesses are eager to raise capital and borrow to make further investments. At the same time, in her assessment, excessively rapid economic growth could increase pressure on prices.

When I speak with businesses, I hear that they are happy to raise capital and borrow to continue investing. They see growth opportunities, and that is wonderful; I want them to continue to see them. But if growth is too strong, it could put additional upward pressure on prices and intensify inflation. We need to ensure the policy provides sufficient restraint to bring inflation down from above 3% to the 2% target.

Hammack was one of the three “dissenters " at last month's FOMC meeting, so her comments align with her long-held views. She went on: “I am not confident that we will continue to see this policy change or that the readings will be low enough to bring us back to 2%. The task is to ensure we are moving toward that 2%. Then the question is how quickly we need to reach the 2% target. We may get there, but if it takes another three or four years, is that okay?"

The dollar was slightly softer overall in FX markets yesterday, losing ground against most major currencies as softer US data reduced expectations for further Federal Reserve rate hikes. The moves were small, but the direction was clear: mild USD weakness.

Europe’s push for financial autonomy is a strategic effort to reduce dependence on US dominated financial infrastructure and to strengthen Europe’s ability to act independently in a more fragmented global economy. This is now a core EU policy priority, driven by security concerns, geopolitical rivalry, and the weaponisation of financial systems.

Europe seeks to ensure it can finance itself, regulate itself, and run its own payment and market infrastructure without relying on Washington or Beijing.

Key vulnerabilities are now impossible to ignore: Visa and Mastercard handle around 60% of euro-area card payments, meaning Europe’s daily transactions depend on US networks. European companies still rely heavily on US markets for financing, pricing, and liquidity, while clearing, data channels, and technical standards remain deeply tied to US institutions.

The US increasingly links financial infrastructure to export controls and sanctions, creating “side-choice pressure” for Europe. This dependence is now seen as a strategic risk, not merely an economic inconvenience.

Industrial production in the Eurozone was unchanged in June, but edged higher on an annual basis and beat market expectations, Eurostat said yesterday.

Production increased 0.1% YoY, compared with economists' expectations of a 0.8% contraction.

In May, industrial output rose 0.3% month-on-month but fell 0.1% annually.

Among the main industrial groups, production of non-durable consumer goods recorded the strongest monthly increase in June, rising 3%, followed by energy at 1.5%.

Capital goods output fell 1.4%, and intermediate goods production declined 0.8%, while durable consumer goods output increased 0.3%.

Across the EU, industrial production rose 0.2% MoM and 0.6% YoY.

Among member states, Denmark posted the largest monthly increase at 5.4%, followed by Croatia at 5.2%, while Lithuania and Finland each recorded gains of 2.1%.

The steepest MoM declines were recorded in Luxembourg at 10.7%, Portugal at 3.9%, and Estonia at 2.2%. On a YoY basis, Lithuania recorded the strongest growth at 7.7%, while Luxembourg posted the largest decline at 7.9%.

Against a backdrop still marked by the impact of the war in Iran, preliminary GDP figures have provided a positive surprise for the Spanish economy, showing growth of 0.7% QoQ in the second quarter of the year, 0.1% higher than in the first quarter, whilst maintaining stable annual growth at 2.7%, contrary to expectations of a slowdown.

According to the Ministry of Economy, Trade and Enterprise, this growth has been underpinned by strong domestic demand, particularly household consumption. Investment also contributed, with gross fixed capital formation growing by 0.4% QoQ and 5.1% YoY, with particularly strong growth in intellectual property products and construction (5.2% year-on-year).

Winning the World Cup has also provided the backdrop for a more positive attitude going forward.

The euro gained slightly yesterday, rising against the pound, dollar, and Swiss franc, while remaining broadly stable against the Canadian dollar. The moves were modest, but the euro showed mild, broad-based strength across major FX pairs.

Have a great day!