Market News

BY Heather Stewart

UK GDP expanded by a stronger than expected 0.5% in February, official figures show, suggesting the economy was gaining momentum before the onset of war in the Middle East dashed hopes of recovery.

The jump, reported by the Office for National Statistics (ONS), was significantly bigger than the 0.1% forecast by economists. January’s flatlining figure was also revised up, to 0.1% growth.

The ONS said February’s upturn was driven by a strong performance from the services sector and from manufacturing, both of which posted 0.5% growth, and a recovery in construction output, which was up 1%.

Over the three months to February – a measure that tends to be less volatile than the monthly data – GDP expanded by 0.5%, up from 0.3% in the three months to January, echoing the picture of strengthening growth.

Grant Fitzner, the ONS chief economist, said: “Growth increased further in the three months to February, led by broad-based increases across services. Within services, growth was driven by wholesaling, market research, hospitality and publishing, which all performed well in the three months to February.”

He added that Jaguar Land Rover’s recovery from last autumn’s damaging cyber-attack that halted production for weeks had also contributed to the improving three-monthly picture.

While there may have been evidence of a nascent recovery in February, economists have significantly downgraded forecasts for UK growth in 2026, with oil and gas prices soaring as a result of the effective closure of the strait of Hormuz.

Surveys have shown business and consumer confidence declining sharply, and investors believe interest rates may have to rise to restrain the inflationary impact of the war.

Martin Beck, the chief economist at the consultancy WPI Strategy, said: “The real danger is that February turns out to be the calm before the storm, with the consequences of conflict in the Middle East dragging overall Q1 growth down. Last month saw a sharp rise in energy prices alongside a surge in geopolitical uncertainty.”

Suren Thiru, chief economist at the accountancy body the ICAEW, said: “February’s growth will have been followed by a more miserable March with skyrocketing fuel prices and supply chain chaos sparked by the Iran war likely to have stalled economic activity, despite an early Easter boost to sectors like retail.”

Rachel Reeves is in Washington this week, attending the International Monetary Fund’s spring meetings. On Wednesday she expressed her frustration at the likely economic impact of the conflict, telling an audience in the US capital it had been a “mistake”.

Responding to the GDP data, the chief secretary to the Treasury, James Murray, said: “Growth only happens when the economy is on solid ground. That’s why in a changing world our plan to restore stability, boost investment and deliver reform is the right one to build a more stronger more resilient Britain.”

The shadow chancellor, Mel Stride, said: “Any economic growth is welcome, but the IMF were clear this week that under Labour our economy is totally unprepared for the recent energy shock.”

The unexpected strength of growth before the conflict began is likely to worry Bank of England policymakers fretting about whether higher inflation from energy prices will take hold across the wider economy.

Before the war, investors had been expecting the next move in interest rates to be down, with the Bank anticipating a return to its 2% inflation target in the spring. But the prospect of rising energy prices has led markets to price in at least one quarter-point rise in rates this year.

With the next meeting of the Bank’s nine-member monetary policy committee at the end of this month, the governor, Andrew Bailey, told the BBC in Washington on Wednesday that they would not be in a hurry to move.

“There’s really difficult judgments to be made,” he said. “We’re not going to rush to judgments on those things, because there are a lot of uncertainties around this, not just how it’s going to play out, but also how it’s going to pass through into the UK economy.”

An early gauge of how inflation has been affected by the war will come next Wednesday, when official inflation data for March is published.