UK economy shows unexpected growth before Iran conflict

The UK economy demonstrated notable growth ahead of the Iran conflict, contrary to economists’ expectations. According to recent figures from the Office for National Statistics, Gross Domestic Product increased by 0.5 per cent in February, exceeding the anticipated 0.1 per cent. Growth for January was also revised upward to 0.1 per cent from a previous flat estimate.

Grant Fitzner, chief economist at the ONS, highlighted that the growth in the three months leading to February was propelled by widespread increases across various services. The services sector, which accounts for approximately 80 per cent of the economy, contributed significantly with a 0.5 per cent rise in output. Meanwhile, production also recorded a 0.5 per cent increase, although construction faced declines.

Economists warn that this growth may be short-lived due to the ongoing conflict in the Middle East. Yael Selfin, chief economist at KPMG, expressed concerns that the positive momentum in the economy would be derailed by the war in Iran. Increased oil prices are already affecting energy bills for households.

Brent crude oil prices surged by 30 per cent since the outbreak of hostilities on 28 February. This rise has led to increased petrol costs and is expected to exert pressure on inflation, which the Bank of England anticipates could reach as high as 4 per cent within six months. Current consumer price inflation stands at 3 per cent, with a previous expectation by the Bank to lower it to approximately 2 per cent this month.

Policymakers opted to maintain interest rates at 3.75 per cent in March, awaiting the inflationary impact of elevated oil and gas prices due to the disruption in the Strait of Hormuz, a vital transit route for global oil and gas supplies. Many economists predict that March GDP may reflect either stagnant or negative growth, indicating a shift towards economic fragility and potential stagflation, characterised by sluggish growth alongside rising inflation.

Recent assessments from the International Monetary Fund have downgraded the UK’s GDP growth forecast for the year to 0.8 per cent, down from an earlier estimate of 1.3 per cent. The IMF indicates that the UK will experience the most significant downturn among the G7 nations due to the conflict.

Rachel Reeves, Chancellor, has cautioned that the Iran conflict will incur considerable costs for British families and businesses. James Murray, Chief Secretary to the Treasury, emphasized the necessity for a robust economic foundation for sustainable growth moving forward.