Recent official statistics reveal that the UK’s Gross Domestic Product (GDP) grew by a surprising 0.5% in February, indicating a potential strengthening of the economy just before the escalation of conflict in the Middle East undermined recovery expectations.
The Office for National Statistics (ONS) reported this increase, which far surpassed economists’ predictions of a mere 0.1%. Additionally, the GDP figure for January was adjusted upward to reflect a 0.1% growth instead of a stagnation.
According to the ONS, the growth in February was largely fueled by robust performances in both the services and manufacturing sectors, each achieving a 0.5% increase, alongside a notable 1% rise in construction output.
Over the three-month period leading up to February, a more stable measure than the monthly figures, GDP also rose by 0.5%, up from 0.3% in the previous three-month span, reinforcing the trend of increasing economic activity.
Grant Fitzner, the chief economist at the ONS, commented, “The growth trend continued to strengthen in the three months to February, primarily driven by widespread gains across the services sector. Specifically, the growth was propelled by wholesaling, market research, hospitality, and publishing, all of which showed positive results during this period.”
He also noted that the recovery of Jaguar Land Rover from a significant cyber-attack last autumn, which had severely disrupted production, played a role in the improved three-month outlook.
Despite signs of an emerging recovery in February, economists have significantly revised downwards their projections for UK growth in 2026, particularly due to surging oil and gas prices caused by the blockade of the Strait of Hormuz.
Business and consumer confidence has reportedly declined sharply, leading investors to anticipate that interest rates may need to increase to counteract the inflationary pressures resulting from the ongoing conflict.
Martin Beck, chief economist at WPI Strategy, warned, “The real concern is that February could be a brief period of calm before significant turmoil, as the ramifications of the conflict in the Middle East may negatively affect overall growth in the first quarter. Last month saw a significant spike in energy prices, coupled with increased geopolitical instability.”
Suren Thiru, chief economist at the ICAEW, remarked, “Following February’s growth, March is likely to present a more challenging scenario, as soaring fuel prices and supply chain disruptions due to the war in Iran will probably hinder economic activity, despite an initial boost from the early Easter period for retail sectors.”
This week, Rachel Reeves is in Washington attending the spring meetings of the International Monetary Fund, where she conveyed her concerns regarding the economic implications of the conflict, labeling the situation a “mistake” during her speech in the U.S. capital.
In response to the GDP figures, James Murray, the chief secretary to the Treasury, stated, “Sustainable growth is only achievable when the economy is stable. Our strategy to restore stability, promote investment, and implement reforms is essential for building a stronger, more resilient Britain.”
Shadow Chancellor Mel Stride acknowledged that while any growth is positive, the IMF’s recent statements highlighted that the economy remains ill-prepared for the current energy crisis under Labour leadership.
The unanticipated strength of the economy prior to the conflict raises concerns for Bank of England officials, who are apprehensive about the potential for escalating inflation from energy costs to permeate the broader economy.
Before the outbreak of war, market expectations were leaning towards a decrease in interest rates, with the Bank forecasting a return to its 2% inflation target by spring. However, the likelihood of rising energy prices has shifted market sentiment towards anticipating at least one quarter-point rate hike this year.
As the Bank’s monetary policy committee prepares to convene at the end of this month, Governor Andrew Bailey remarked to the BBC in Washington that they would be cautious in their decision-making. “We face challenging decisions,” he stated. “We will not hastily conclude anything as uncertainties abound regarding both the situation’s evolution and its implications for the UK economy.”
An initial assessment of how inflation may be affected by the ongoing conflict will be available next Wednesday with the release of the March inflation data.
