The UK economy unexpectedly grew in March, concluding a robust overall first quarter. This indicates that the economic fundamentals are stronger than the widespread market concerns, particularly amid the escalating situation with Iran. However, economists note that seasonal distortions likely inflated the latest data figures. The Office for National Statistics reported that Gross Domestic Product grew by 0.3% month-on-month in March; a Reuters poll of economists had previously anticipated a contraction of 0.2%. Output in the services sector, construction, and manufacturing all showed strong growth. For the first quarter as a whole, the UK economy grew by 0.6% compared to the previous quarter, marking the third consecutive year of notably strong first-quarter growth. Economists believe that statistical distortions arising from shifts in household consumption patterns following the pandemic are likely the primary reason for this recurring trend. Raj Badiani, Economics Director at S&P Global Market Intelligence, stated that the Iran conflict has triggered stockpiling behavior by businesses, which also pulled forward some consumer demand in March. He pointed out: "Despite the impressive first-quarter figures, the risk of recession has increased. Driven by higher oil prices pushing up inflation and pressure on the Bank of England to raise interest rates, we expect the UK economy to experience a mild contraction in the second and third quarters of this year." The Office for National Statistics indicated that some spending data for April "suggests the economy could weaken in the second quarter." Political uncertainty has once again emerged in the UK, with markets questioning the political future of Prime Minister Keir Starmer. How this might subsequently weigh on the economic outlook remains to be seen. In a blog post published on Thursday, the Office for National Statistics acknowledged a structural shift in the timing of domestic consumption expenditure post-pandemic and stated it is reassessing its economic accounting methods. As a result, the agency slightly revised down its economic growth estimates for the first quarters of 2024 and 2025. James Smith, an economist at ING, commented: "There is clearly a bias in the way the economic data is seasonally adjusted, which we believe is a legacy issue from high inflation and the annual price increase cycle." "The published data is unlikely to significantly alter the Bank of England's policy stance. The central bank's sole current focus is the impending surge in inflation and the risk of this feeding into wage growth." A Reuters poll of economists this week shows that the Bank of England is expected to keep its benchmark interest rate at **3.75%** this year; however, more than a third of economists anticipate at least one interest rate hike within the year, as the Iran conflict pushes up energy prices and inflation expectations. In contrast, financial market pricing has already factored in the Bank of England implementing 2 to 3 interest rate hikes this year, each of 25 basis points.
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