The UK economy started 2026 with robust growth, indicating that businesses and consumers maintained resilience in the initial weeks following the outbreak of conflict in the Middle East. Data released by the Office for National Statistics on Thursday showed that Gross Domestic Product (GDP) grew by 0.6% quarter-on-quarter in the first quarter, up from 0.2% in the final quarter of last year, marking the fastest pace of expansion in a year. This figure matched the median forecast of economists and exceeded the Bank of England's previous estimate of 0.5%.
All major components of economic activity contributed to the growth in the first quarter. Consumer spending increased by 0.6%, business investment rose by 0.7%, and government expenditure on goods and services grew by 0.4%. Net trade acted as a slight drag on the economy due to a widening trade deficit. The services sector, which drives the UK economy, expanded by 0.8% during the quarter. The Office for National Statistics attributed the strong performance in services to widespread growth in industries such as wholesale trade, advertising, and computer programming.
The pace of improvement in living standards was the fastest since 2022, with real GDP per capita growing by 0.6% in the first quarter, up from 0.1% at the end of 2025. The strong first-quarter performance was largely driven by impressive growth in February, which reached 0.4% before the Middle East conflict began. Furthermore, the economy grew by 0.3% in March as output increased across all sectors, defying economists' expectations of a slight contraction.
March GDP data indicated quarter-on-quarter growth in services, manufacturing, and construction. However, it is worth noting that the strong growth in March may partly reflect businesses and households stockpiling in advance to avoid potential supply disruptions and to prepare for possible interest rate hikes related to the Middle East conflict. Official retail sales data showed drivers rushing to fill their fuel tanks in March. Construction firms reported in the S&P PMI survey that they were increasing their stocks of raw materials.
Nevertheless, the robust first-quarter data may face skepticism from many economists. They suspect that the Office for National Statistics has not fully adjusted for changes in seasonal spending patterns. Even rate-setters within the Bank of England have expressed concerns about the reliability of these figures. In recent years, the UK economy has often performed well in the first and second quarters before stagnating or contracting in the third and fourth quarters.
One theory suggests that business investment is increasingly concentrated at the start of the year. Another explanation, as noted by the Office for National Statistics, is that households and businesses postpone major financial decisions ahead of the autumn budget. James Benford, Director General for Surveys and Economic and Social Statistics at the Office for National Statistics, stated, "One consequence of deferred spending is stronger growth in the first quarter—as we are seeing now—and we have seasonally adjusted for this. However, it is difficult to determine how much of this is a new norm following the shift to an annual fiscal policy cycle and how much is merely a temporary change related to the post-pandemic adjustment period."
**Energy Shock and Political Turmoil Cloud Economic Outlook**
Meanwhile, economists warn that UK growth now faces risks as the Middle East conflict persists with no end in sight and the likelihood of a new prime minister taking office increases. Energy prices have surged significantly since late February when the US and Israel launched attacks on Iran, leading to the near-total closure of the Strait of Hormuz, a critical global energy transit chokepoint. In this context, the outlook for UK economic growth has weakened.
A survey of economists last month indicated that the UK economy is expected to grow by 0.7% in 2026 and 1.2% in 2027. Both figures are lower than previous forecasts. The UK's energy mix is heavily reliant on natural gas. The Middle East conflict has caused the price of gas, on which the UK heavily depends, to double. While much of the gas is produced domestically, a portion is imported, and imported gas is priced at market rates, which are significantly higher.
Experts warn that household gas and electricity costs in the UK are projected to rise by nearly 20% this summer, pushing the average July bill close to £2,000. The ongoing energy shock could further dampen growth and employment while increasing the risk of an inflationary feedback loop, as workers may demand higher wages to compensate for losses, and businesses facing profit squeezes may attempt to raise prices. Evidence of such effects has been limited so far, as neither employees nor firms have had significant bargaining power during a period of corporate layoffs and fragile demand.
Most economists believe the UK faces a heightened risk of stagflation. Survey data indicates that the Middle East conflict continues to weigh on private sector activity. S&P Global data shows businesses reported soaring energy costs and weakening demand in April, intensifying concerns about "stagflation." The Office for National Statistics also noted that some consumer spending data for April showed "some signs of weakening as we move into the second quarter," with indicators of consumer demand slowing.
Although the Bank of England kept interest rates unchanged at the end of last month, the meeting minutes explicitly stated that several members who supported holding rates hinted they "might consider raising rates at future meetings." Several policymakers warned that if energy prices do not fall quickly, financial conditions "may need to tighten." Bank of England Governor Andrew Bailey stated that under some of the milder economic impact scenarios of the Middle East conflict considered by the central bank, rate hikes might not be necessary to control inflation. However, he issued a clear warning: "If energy supply disruptions persist severely, interest rates may need to be increased."
In the Bank's worst-case scenario, which assumes oil prices remain around $130 per barrel and trigger substantial "second-round effects," models suggest the interest rate required to curb inflation would rise significantly, with hikes ranging between 66 and 151 basis points.
Political instability may also cast a shadow over the UK's economic prospects. According to media reports on Tuesday, Prime Minister Keir Starmer is discussing with colleagues whether to continue as prime minister ahead of a crucial cabinet meeting. This follows the resignation of several ministerial aides and nearly 80 Members of Parliament publicly calling for his resignation. Starmer has been in office for less than two years. In last week's local elections, the ruling Labour Party, led by Starmer, suffered a significant defeat, with a large number of its MPs defecting. Following the electoral loss, Labour MPs have publicly called for Starmer's resignation.
Political instability could plunge the UK economy into difficulty. The UK has already experienced frequent changes in leadership, with five different prime ministers in the past seven years. After his election in July 2024, Starmer pledged to focus on economic development. However, growth has remained sluggish due to multiple factors, including government tax increases, an aging population, and persistently low productivity. The ongoing political turmoil further undermines investor confidence, casting a shadow over economic recovery.
Economists Ana Andrade and Dan Hanson commented, "The UK economy started 2026 strongly, continuing a recent pattern. We expect this pace to be difficult to sustain, as higher energy costs and tighter financing conditions are likely to bring growth close to a standstill in the coming quarters. Recent political turmoil will also weigh on economic activity and reinforce this view."
Ruth Gregory, Deputy Chief UK Economist at Capital Economics, stated, "Given that the impact of the Middle East conflict is likely to erode growth in the second quarter, this is likely to be the peak for annual growth." In Capital Economics' baseline forecast, the UK economy is expected to stagnate in the second and third quarters. In its most pessimistic scenario, the UK could fall into a mild recession.
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