Millennium wheel and skyline at sunset. London, England.
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The UK economy grew by 0.5% in February, according to preliminary figures released by the Office for National Statistics on Thursday.
Economists polled by Reuters had expected Britain’s gross domestic product (GDP) to expand by 0.1% from the previous month.
Services and production both rose 0.5% in February, while construction rose 1%.
The recovery comes after the economy grew by 0.1% in January (initial ONS estimates suggested the economy had flattened).
Analysts said February’s numbers were much better than expected, but given subsequent events in the Middle East, including the US and Iran launching military operations against Iran on February 28, they would be seen as significantly negative data.
“We’re not really sure that this reflects the actual state of the economy,” Schroders senior economist George Brown told CNBC on Thursday, suggesting that residual seasonality is influencing the data.
“Obviously, this is old data,” he told CNBC’s “Squawk Box Europe.” “We’re entering a new world of the Iran conflict. When you get down to it, the February numbers would suggest we’re in a good position, but the reality is that the situation on the ground probably isn’t that way.”
“The labor market is clearly deteriorating, the unemployment rate is over 5%, and the economy is not doing very well,” he added.
The International Monetary Fund warned earlier this week that Britain could suffer the biggest hit to growth from the Iran war among major economies.
The IMF now expects the UK to grow by just 0.8% in 2026, down from its previous forecast of 1.3%. What the IMF decided in January
“Looking ahead, we expect growth to slow,” Sanjay Raja, chief UK economist at Deutsche Bank, said in an emailed analysis.
“Certainly, increased uncertainty will constrain spending and investment. Tighter financial conditions are also not helping. We also expect production to take a hit as sentiment weakens,” he added.
inflation pressure
As a net energy importer, the UK is particularly vulnerable to global energy price shocks, such as those caused by the Middle East conflict, which inhibits oil and gas exports from the region.
Before the war began in late February, the Bank of England was expected to cut interest rates as inflation cooled to its 2% target. However, the war disappointed those expectations.
Economists now expect UK inflation to accelerate from 3% in February to 3.3% in March, forcing the bank to raise interest rates at least once this year. The latest inflation statistics are scheduled to be released on April 22nd.
Patrick O’Donnell, chief investment strategist at Omnis Investments, said February’s gross domestic product data was likely to have minimal impact on the thinking of Bank of England policymakers at their next meeting later this month.
“Given the high level of uncertainty and multiple cross-currents, we expect the BoE to remain on hold. Looking beyond April, the market is split between 25 basis points and 50 basis points of rate hikes by the end of the year. We think the BoE is likely to keep policy rates on hold at this point, as it still sees the bank rate as remaining in a restrictive zone.”
