Quarterly economic commentary: April to June 2026

• Real GDP increased by 0.5% in Quarter 2 (Apr to Jun) 2026, up 1.4% compared with a year ago; the household saving ratio rose slightly to 8.8%, where it remains above pre-coronavirus (COVID-19) pandemic levels.

• The UK underlying current account deficit (excluding precious metals) narrowed to 1.4% of GDP in Quarter 2 2026, where there was a net financial inflow of other investment into the country, as UK investors disinvested their holdings of foreign assets.

• The labour market remained broadly stable, with unemployment unchanged, at 4.9%, in the three months to July, while early estimates show that payrolled employment fell by 0.5% in the 12 months to August 2026.

• UK consumer price inflation (CPI) was 3.1% in the year to August 2026; core inflation (excluding energy, food, alcohol and tobacco) remained unchanged, at 2.6% among the highest in the G7 economies.

• Public sector net borrowing in the financial year to August 2026 was £77.3 billion, £8.1 billion above the Office for Budget Responsibility's March 2026 forecast.

Real gross domestic product (GDP) increased by 0.5% in Quarter 2 (Apr to Jun) 2026, following a 0.6% growth in Quarter 1 (Jan to Mar) 2026. Real GDP was 1.4% higher than a year earlier. Services were the main contributor to GDP growth in Quarter 2 2026, especially professional, scientific and technical activities, and information and communication.

More recently, real GDP is estimated to have grown by 0.4% in the three months to July 2026, compared with the three months to April 2026. Monthly GDP growth strengthened over the summer, rising by 0.4% in July, and providing an early indication of a solid start to Quarter 3. More information is available in our GDP monthly estimate, UK: July 2026 bulletin.

Real GDP per head, a proxy measure for economic welfare, is estimated to have increased by 0.5% in Quarter 2 2026 and is up 1.2% compared with the same quarter a year ago.

Another welfare indicator is real gross domestic income (GDI), which measures the purchasing power of UK output over goods and services in global markets. The terms-of-trade capture the rate of exchange between internationally traded goods and services produced by one country relative to another. A change in the terms-of-trade leads to a change in the purchasing power of a country and has an impact on how much a country can purchase, given how much it produces. Real GDI increased by 0.2% in Quarter 2 2026 and is 0.8% higher than a year ago. This reflects how import prices have increased by more than export prices over the last year, mainly because of higher commodity prices, such as energy products.

Household consumption in volume terms continued to expand in Quarter 2 2026, although growth slowed to 0.3%. Consumer confidence remained subdued and households' willingness to make major purchases remained weak over the same period, albeit there was some improvement in Quarter 3 (July to Sept). The household saving ratio rose slightly to 8.8%, led by higher non-pension saving, but remained below its recent peaks and above pre-coronavirus (COVID-19) pandemic levels (Figure 2).

Business investment increased by 1.8% in Quarter 2 2026 and was 5.2% higher than a year earlier. Survey evidence from the Agents' summary of business conditions September 2026 suggested tentative signs of improving investment intentions from a low base, including renewed spending on infrastructure, automation and artificial intelligence. However, demand uncertainty, cost pressures and borrowing costs continued to restrict investment, especially among construction and property businesses.

Broader business conditions remained subdued. In our Business insights and impact on the UK economy: 24 September 2026 bulletin, 28% of trading businesses reported lower turnover in August, while economic uncertainty remained the most reported challenge. Businesses also faced increased input costs and growing concern about energy prices, partly linked to the conflict in the Middle East.

Households and non-profit institutions serving households (NPISH) remained net lenders in Quarter 2 2026, at 2.4% of nominal GDP. Corporations also returned to net lending, led by private non-financial corporations, while financial corporations remained net borrowers. However, these positions were outweighed by general government borrowing, which increased during the quarter, while the UK continued to borrow from the rest of the world (Figure 3).

The UK remained a net borrower from the rest of the world in Quarter 2 (April to June) 2026. The underlying current account deficit (excluding precious metals) narrowed to 1.4% of gross domestic product (GDP), as the provisional estimate of FDI income surplus remained high. The total current account deficit also narrowed to 2.5% of GDP over the same period, in part reflecting the high value of precious metals imports (see Figure 4).

The trade in goods deficit has been narrowing , despite higher energy prices following the conflict in the Middle East, where the UK is a net energy importer. The S&P Global's Purchasing Managers Index (PMI) business survey shows that the level of new export business rose for the eighth month running in August, as foreign demand for UK manufactured consumer and investment goods improved. There has also been a widening of the trade in services surplus in Quarter 2, including in other business services.

The current account deficit is financed by net financial inflows into the UK. These financial flows in and out of the country can be volatile, particularly among more mobile forms of capital, such as other investment. There was a net financial inflow of other investment into the UK in Quarter 2, as UK investors disinvested their holdings of foreign assets. There was also a net financial outflow of portfolio investment, as UK investors increased their holdings of foreign assets in equity and debt investments. The preliminary estimate of the UK's net international investment liability position was £196.8 billion at the end of Quarter 2 2026.

The labour market remained broadly stable in the three months to July 2026, with indications of continued slack. The employment and unemployment rates were unchanged from the previous three-month period, at 75.1% and 4.9%, respectively. However, other indicators pointed to weakening labour demand, including early estimates showing that payrolled employment fell by 0.5% in the 12 months to August 2026.

The number of job vacancies has remained broadly flat since the start of 2026, although these fell in the three months to August 2026 when compared with March to May 2026. Vacancies were at their lowest level since February to April 2021, at 702,000.

Recruitment difficulties also continue to be below normal levels, according to the Bank of England's Agents' summary of business conditions - September 2026 survey. The ratio of unemployed people to vacancies remained at 2.5 in May to July 2026, unchanged since July to September 2025. For more information, see our Vacancies and jobs in the UK: September 2026 bulletin.  

Most broader measures of labour market availability declined for a second consecutive quarter in Quarter 2 2026, indicating that some existing spare capacity is being reduced. However, all measures remained above their pre-coronavirus (COVID-19) pandemic levels (Figure 5). For more information on labour market availability measures, see our Alternative measures of underutilisation in the UK labour market article.

External indicators present a mixed picture of labour market conditions. The latest Bank of England Monthly Decision Maker Panel reported that realised employment fell by 0.2% in the three months to August 2026 compared with a year earlier. In contrast, the latest KPMG and REC UK Report on Jobs reported the first broad-based expansion in permanent and temporary staffing in almost four years.

Average weekly earnings regular pay growth (excluding bonuses) remained at 3.5% in the 12 months to May to July 2026. Public sector regular pay growth (6.3%) continued to outpace private sector pay growth (2.9%), partly reflecting a base effect from the early payment of NHS pay awards in the previous year. For more information, see our Average weekly earnings in Great Britain: September 2026 bulletin.

Headline consumer price inflation (CPI) increased to 3.1% in August 2026, up from 2.9% in July, while core inflation (excluding energy, food, alcohol and tobacco) remained unchanged at 2.6%. UK core inflation was among the highest in G7 economies (see Table 1).

Alternative measures of core inflation also suggest little change in underlying price pressures. The 15% trimmed mean increased to 2.5% in August but remained within its 2026 range, while median inflation was 2.7% (Figure 6). These measures exclude the most volatile price movements, providing a more stable indication of underlying inflation trends.These alternative measures are discussed in our New estimates of core inflation, UK: 2022 article.

The increase in headline inflation was primarily driven by higher transport and fuel costs. Transport inflation rose from 3.6% in July to 4.6% in August 2026, with motor fuel prices making the largest upward contribution to the increase in headline inflation.

The rise in energy prices followed the intensification of the conflict in the Middle East. Higher oil prices have already contributed to increased motor fuel prices and wider supply-chain pressures, with refined petroleum products contributing to higher input and output producer price inflation. Their effect on household gas and electricity prices will emerge with a lag. The Office of Gas and Electricity Markets (Ofgem) energy price cap will rise by 4%, from £1,663 to £1,723, in October 2026, with the removal of VAT on electricity partly offsetting the increase in wholesale energy prices.

Despite these wider cost pressures, food inflation remained subdued, at 1.3%, in August 2026, close to its lowest rate since 2021, partly reflecting base effects from price increases a year earlier. Some of the recent increases in energy and transport costs could feed through to food prices with a lag. The impact of recent and upcoming weather patterns is also a risk for food prices.

Measures of household inflation expectations remained mixed. Expectations in the Bank of England and Savanta Inflation Attitudes Survey fell between May and August 2026, especially at the one-year horizon, although this should be interpreted carefully following the change in survey provider. By contrast, the Citi and YouGov survey showed increases at both the one-year and five-year horizons between July and August 2026.

Expectations among businesses remained elevated, with firms' year-ahead inflation expectations at 3.1% in the three months to August. Expected wage growth remained stable, at 3.4%, according to the Decision Maker Panel (DMP) survey. Firms expected higher energy prices to result mainly in higher prices and lower profit margins, with more limited effects on wages.

Evidence from the Business Insights and Conditions Survey (BICS) also suggests that pricing pressures remained. More businesses reported increases in the prices of goods and services bought than in those sold in August, while the proportion expecting to raise selling prices increased. Businesses also reported greater concern about energy prices in early September.

Public sector net borrowing was £18.3 billion in August 2026, bringing borrowing in this financial year to £77.3 billion. This was £8.1 billion above the Office for Budget Responsibility's (OBR's) March 2026 forecast, mainly because central government expenditure was more than £7 billion higher than expected, including spending on social benefits and debt interest. Higher inflation, partly reflecting the conflict in the Middle East, increased expenditure on index-linked debt interest. Central government receipts were also above forecast, including Pay As You Earn (PAYE) income tax and National Insurance contributions, but offset higher expenditure by only around £1 billion (Figure 7).

The UK Government's costs to finance its accrued deficit (net borrowing), or to refinance its existing debt, have increased since the start of this financial year. Government bond yields have increased in the UK and in other countries this year, in part reflecting higher inflation being priced in by financial markets (Figure 8).

Higher yields increase borrowing costs as new debt is issued, and existing debt is refinanced. In addition, movements in the Retail Prices Index (RPI) have increased accrued interest on index-linked gilts, adding to public sector net borrowing and net debt this financial year.

Public sector net debt, which is the amount owed to the UK private sector and overseas minus liquid assets, was provisionally estimated at £2,985.5 billion, or 93.8% of GDP, at the end of August 2026. This is an increase of £78.5 billion from a year earlier.

According to the UK Debt Management Office, around one-third of UK gilts are held overseas, meaning that some gilt interest payments flow to non-UK investors. Public sector net financial liabilities, a broader balance sheet measure that includes additional financial assets and liabilities, were estimated at £2,620.4 billion, or 82.3% of GDP, £108.7 billion higher than a year earlier.