The Iran war risks bringing the G7’s fastest-growing economy to a halt

The U.K. economy is showing further signs of a long-awaited rebound, but the picture is complicated by the fallout from the Iran war and high energy prices.

Brits have spent more than expected in recent months amid hot weather, a strong performance in the FIFA World Cup and an uptick in business confidence.

Official data published Thursday showed the U.K. economy grew by 0.4% in the second quarter, following 0.6% expansion in the first quarter. Business investment increased by 1.7% in the same period, defying the forecast in a Reuters poll of economists for a 0.5% decline.

The figures keep the country on track to record the strongest growth of any G7 nation for a second straight quarter, Sanjay Raja, Deutsche Bank’s chief U.K. economist, said Thursday. Raja said the latest figures brought the annualized growth rate across the first half of the year to a “scorching” 2%.

“Some slowdown remains likely,” Raja added, particularly as higher prices at the pump squeeze household incomes. “But for the first time in a while, we now see modest upside risks brewing.”

However, the economic outlook facing new U.K. Prime Minister Andy Burnham is not all rosy.

In April, the International Monetary Fund warned that the U.S. and Israel’s war with Iran — which shows little sign of concluding — would hit the U.K.’s growth prospects harder than any other rich country.

The U.K. is highly exposed to higher energy prices due to its oil and gas imports, and has also suffered a sharper spike in goods inflation than most of its peers in recent years.

Bloomberg reported Wednesday that Treasury officials had presented worst-case scenario modeling to Burnham. The Treasury figures reportedly suggested growth could slow to just 0.3% next year if disruption on the Strait of Hormuz persists. The Treasury did not respond to a CNBC request for comment.

Tomasz Wieladek, chief European macro economist at T. Rowe Price, said there were encouraging signs that the driver of U.K. growth had shifted from higher government spending to stronger private sector performance.

However, the notion that the Middle East conflict has left the British economy unscathed is “likely too good to be true,” Wieladek added.

“Normally, growth in the first two quarters is reported to be much stronger than in the second half of the year,” Wieladek said.

Shaniel Ramjee, co-head of multi asset at Pictet Asset Management, highlighted that growth was concentrated in the U.K.’s dominant services industry.

“The hot weather has helped the services sector, but in fact, when we have a global infrastructure boom, our construction sector and our industrial production sector are down on the year,” Ramjee told CNBC.