UK GDP surprised to the upside in February before the start of the Iran war, with growth of 0.5% much faster than had been anticipated, according to figures from the Office for National Statistics.
Industrial production and services rose sharply, although this was partly offset by contracting manufacturing activity. Retail sales fell after a stronger-than-expected January while the property market remained subdued.
Growth was also revised higher for January, up to 0.3%, suggesting the UK economy was starting to recover before the outbreak of war in the Middle East, which has caused oil prices to spike and inflation concerns around the world.
Lindsay James, investment strategist at Quilter, said the true fallout from the Iran war is “yet to be felt” but the figures are a “welcome relief to the Labour government”.
However, “unfortunately for the government, the worst is yet to come,” she added, with expectations that “headwinds will build from here on” after a strong start to the year, which is already 0.8% higher than at this time in 2025.
The figures come after the International Monetary Fund (IMF) slashed its growth forecasts for the UK from 1.3% to 0.8% in 2026 this week, the worst revision within the developed world.
Luke Bartholomew, deputy chief economist at Aberdeen, said today’s figures feel “very dated” given the change in the macroeconomic picture since February.
“As the IMF recently pointed out, the UK economy was very exposed to the shock from the Iran war as a large energy importer with weakly anchored inflation expectations and an already very soft labour market.”
The return to growth could be short-lived, added Scott Gardner, investment strategist at JPMorgan Personal Investing, who noted that the impact of the conflict is starting to filter through into the March figures, with PMI data pointing towards “a softening in services activity”.
GDP will impact the Bank of England’s decisions on interest rates moving forward, with James noting that the market still expects it to cut at least once this year.
“A fairly strong start to 2026 may give it enough cover to do so,” she said, but with growth now forecast by some to stall completely, the BoE is going to have to make a call on how much to look through any inflation spike and focus on the potential growth implications that are to follow, she noted.
“The UK economy has started 2026 well, but finds itself in a weakened position now, and any hikes could just cut off any green shoots that do survive this period.”