The UK economy expanded rapidly in the weeks preceding the outbreak of war with Iran, highlighting the significant impact the Middle East conflict has had on its economic trajectory.
Official data released on Thursday showed the nation's Gross Domestic Product (GDP) grew by 0.5% in February, following an upwardly revised increase of 0.1% in the previous month. This performance significantly surpassed economist forecasts of 0.1% growth, marking the strongest monthly expansion since January 2024.
Growth was driven by the services sector, which recorded its fourth consecutive month of expansion. Both production and construction sectors also saw growth in February.
However, economic sentiment surrounding the UK shifted dramatically following the US and Israeli military strikes against Iran on February 28th. This event disrupted global energy supply chains and triggered widespread market turbulence.
The conflict is expected to hit the UK harder than most other major developed economies, potentially driving up borrowing costs and increasing pressure on the already strained government. Economists have revised growth forecasts downward significantly, while anticipating inflation could surge to nearly double the Bank of England's target. According to estimates from the Resolution Foundation, the energy shock could reduce the average household's real income by £500 ($673).
In a television interview, the UK Secretary of State for Business and Trade described the situation as a mixed moment. He noted that prior to the conflict, fundamental economic indicators such as rising productivity, falling inflation, and lower interest rates were moving in a positive direction. He added that these factors had been improving, but the economy now faces a new set of global uncertainties and challenges.
UK government bond yields fell by 4 basis points at the open, aligning with movements in European bonds. The British Pound rose 0.1% against the US Dollar.
Ahead of their next policy meeting on April 30th, Bank of England officials must balance the risk of runaway inflation against the threat of an economic downturn. The Middle East conflict and its impact on global energy supplies show little sign of abating, and the current ceasefire between the US and Iran remains fragile.
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