UK economy rebounds in the first quarter, but will it last?

The Office for National Statistics (ONS) has reported that the UK economy unexpectedly grew by 0.3% in March, the month when the war in the Middle East began. As a result, the UK economy grew by 0.6% during the first quarter of 2026, an increase of 0.4% on the growth reported over the last quarter of 2025 and the highest since Q1 of 2025.

Notably, the UK leads all G7 countries in growth over the opening quarter of the year, except for Japan, which has yet to announce its growth figures but is expected to come in lower.

In this article, we examine what economists believe may reflect 'front-loaded activity' by businesses and consumers anticipating future price rises, as well as questions about the reliability of the ONS data.

What is the current state of the UK economy?

Recent figures from the ONS reflect a more resilient economic picture than previously anticipated, as many economists, downplaying February’s positive growth, warned that the economy had yet to feel the negative impact of the conflict in the Middle East. A Reuters poll of economists indicated that March was expected to show a 0.2% contraction in economic growth.

While March brought unexpected economic growth of 0.3%, the reality is likely less positive. Fearing that the war in the Middle East would drive up prices, many consumers and businesses rushed to make purchases early, artificially boosting activity in some sectors.

Economics Director at S&P Global Market Intelligence commented that “the stockpiling of goods sparked by the Iran war may also have pulled forward demand in March… Nevertheless, recession risks have risen and we now expect the UK economy to contract mildly in the second and third quarters of this year.”

It is also worth pointing out that the growth in the first quarters of 2024 and 2025, 0.8% and 0.7% respectively, were followed by much lower GDP figures over the remainder of those years. Similar trends are expected to continue this year, although geopolitical and national turmoil could yet add to the uncertainty. GDP records for January and February of this year were revised down from 0.1% and 0.5% to 0% and 0.4%, respectively, due to revised source data, seasonal adjustments, and balancing adjustments.

These adjustments are beginning to raise questions around the reliability of the data, with Dan Hanson, Chief UK Economist for Bloomberg Economics, pointing out that “If recent history is any guide, the economy will slow markedly in the coming quarters, consistent with activity being frontloaded into the first three months of the year.”

Up until the start of the war in Iran, the Bank of England (BoE) had been on a trajectory to reduce the base rate, but it has since changed course, with at least one rate increase expected later this year and further increases in 2027. Inflation, which had been steadily falling, has increased to 3.3%, and will likely continue to present challenges for the bank, which works towards a target inflation rate of 2%. You can read more about where interest rates are headed in our regularly updated article, “Will interest rates continue to fall in 2026 or start going back up?”.

Why did the UK economy grow in March?

Growth over the three months to March was spurred by construction output, which grew by 0.4%, and production output, which grew by 0.2%. The most significant contribution to growth came from services output, which returned positive growth of 0.8%. Boosted repairs and maintenance of motor vehicles and motorcycles were responsible for the biggest positive effect within services, mirroring the fact that repairs and maintenance in the construction sector were also the largest contributor to its success.

In contrast to these positive results, the travel agency and tour operating services made the largest negative contribution, as travellers are demonstrating changing trends, likely due to the hike in flight costs caused by rising jet fuel prices.

While the Chancellor of the Exchequer, Rachel Reeves, was keen to attribute growth to government choices that have created resilience against the inflationary effects of the war in Iran, many economists believe that much of the negative impact of the war may yet be seen.

Chancellor Rachel Reeves credited government policies for the recent economic growth, claiming they have shielded the UK from inflation linked to the war in Iran. Economists, however, are less convinced, warning that we might not have seen the full negative impact of the conflict yet

The Chief Economist at RSM Global, Thomas Pugh, said that the most recent results, “probably mean that we’ve already had almost all the growth we’re likely to see in the UK economy this year.. Surging energy prices, higher borrowing costs and a renewed bout of political uncertainty will conspire to bring growth almost to a standstill for the rest of the year.”

What does economic growth mean for interest rates?

The Bank of England's Monetary Policy Committee (MPC) will next meet on 18th June 2026 to decide whether to change the base rate. At its last meeting on 30th April 2026, the MPC voted by an 8-1 majority to hold the rate at 3.75%.

Based on the swaps market, there is a high probability that the Bank of England will keep interest rates unchanged in June, but a 0.25 point increase by the end of the year is now fully priced in. The Deputy Governor of the BoE, Sarah Breedan, responded to The Financial Times questions around the timing of an expected rate increase by saying, “You’re obviously correct that we can’t wait forever, but we don’t need to do it in June or July”.

Where will interest rates go in 2026?

What happens to interest rates in 2026 will largely depend on two main factors. Globally, the markets are closely watching the Middle East and the ongoing efforts to reach an agreement. Closer to home, recent votes of no confidence in Prime Minister Keir Starmer have created political uncertainty, which is also affecting financial markets. In the immediate aftermath of these political events, the value of the British Pound has fallen and gilt yields have spiked, increasing the cost of borrowing.

As we have seen in recent days and weeks, predictions regularly change. Check out our regularly updated article where we provide the latest UK interest rate predictions, so you can stay up to date on where interest rates might go in the future.