UK economy grew faster than expected before Iran war

The UK economy grew more than expected in February before the breakout of the Iran war, new figures from the Office for National Statistics (ONS) show.

ONS said gross domestic product (GDP) grew by 0.5 per cent month-on-month in February – the fastest expansion since January 2024 – following upwardly revised growth of 0.1 per cent in January.

Most economists had forecast GDP to rise by just 0.1 per cent in February, while the ONS had previously predicted no growth in January.

Economists polled by Reuters had forecast 0.2 per cent growth in gross domestic product for the December-February period compared with the previous three months.

However, the figures are backward-looking and are from economic conditions prior to the breakout of the war in the Middle East.

Since then, forecasts have widely suggested that Britain’s output will be hardest hit this year by the fallout from the Iran war and soaring energy costs, driven by the increase in oil prices.

A stark economic outlook report from the International Monetary Fund (IMF) earlier this week showed the UK facing the biggest downgrade to growth among the G7 group of countries, with 0.8 per cent forecast for 2026, down sharply from the 1.3 per cent predicted in January.

The IMF also said that even in a best-case scenario, global growth would take a downgrade due to the war.

At least one gloomy forecast recently said Britain is heading for “stagflation” as energy prices bite and inflation jumps as a result of the Iran war.

ONS chief economist Grant Fitzner 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. Meanwhile car production recovered from the effects of the autumn cyber incident.

“Growth in services and production was partially offset by another fall in construction, albeit at a slower rate than previously, with leasing and intellectual property licencing also continuing to contract.”

Reacting to the news, 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.

“At the IMF meetings in Washington, the Chancellor has set out how we will go further and faster to boost Britain’s competitiveness and build a stronger, more resilient economy, keeping costs down for families and businesses and taking back control of our energy costs as today we cut bills by up to 25% for 10,000 British businesses.”

A recent consumer confidence poll showed people are concerned about inflation in the coming months, in particular with regard to food prices which are expected to rise up to ten per cent in the second half of the year.

There have been some concerns that rising prices may lead to another bout of interest rate hikes – but with the economy still uncertain and the level of unemployment rising, that is a tough path for the Bank of England to choose.

Governor Andrew Bailey said there are “really difficult judgements to make” and a “lot of uncertainties”, with the BoE predicted to take a cautious approach to any rate movements over the coming months.

Luke Bartholomew, deputy chief economist at Aberdeen, believes other economic data – including the jobs market – will therefore play an important role around the Monetary Policy Committee’s vote at the end of this month.

“While it is no doubt of some interest that the stronger survey data from earlier this year did indeed translate into stronger hard data, ultimately this report feels very dated given all that has happened since February,” he said.

“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. So next week’s inflation and employment data will provide an important early sign of how this shock is playing out, and have much more influence on the path of interest rates than this report.”