UK economy unexpectedly grew by 0.5%, but the outlook darkens

The Office for National Statistics (ONS) has reported a surprise increase in UK GDP for February 2026, just weeks before the US-Israeli attack on Iran triggered economic turmoil. The economy expanded by 0.5% – well above the expected 0.1% – driven by the services and manufacturing sectors, which grew by 0.5%, and construction, which was up 1%. The growth figure for the three months to February 2026 was also 0.5%, up from 0.3% in the three months to January. This data is generally considered less volatile and more reliable than the month-to-month figure.

The GDP recorded for January was revised up from 0% to 0.1%, suggesting the UK economy was gaining momentum before events in the Middle East.

Grant Fitzner, the ONS chief economist, said: "Growth increased further in the three months to February, led by broad-based increases across services. Within services, growth was driven by wholesaling, market research, hospitality and publishing, which all performed well in the three months to February."

What is the current state of the UK economy?

While this new data from the ONS is significant, events in the Middle East have rendered it significantly out of date. Although we can read from the announcement that the economy was showing welcome signs of sustained growth in February, economists have since significantly downgraded UK forecasts thanks to soaring oil and gas prices.

The Bank of England base rate is expected to rise later this year in an effort to tackle the inflationary effect of the war, while business and consumer confidence also have taken a hit. It is important to remember that back in February, before the first attack on Iran was launched, it was widely expected that the base rate would be cut this Spring. Since then, the economic situation has been extremely volatile, with as many as four base rate rises this year priced in at one point.

This week, the International Monetary Fund (IMF) cut its outlook for UK economic growth in 2026 to 0.8%, 0.5 points lower than its previous forecast in January, as it warned of the "large negative effect" the country could face from higher energy costs.

Sanjay Raja, economist at Deutsche Bank, said: "The good news is that the UK likely entered the energy shock on a stronger footing than many expected", but "upward GDP momentum won’t last".

Why did the UK economy grow in February?

The ONS has put February’s 0.5% growth down to a strong services sector performance and a manufacturing boost. Both sectors recorded 0.5% growth. There was also recovery in construction output, which grew 1%. The figure for the three months to February, also 0.5%, was boosted by Jaguar Land Rover’s halt in production following a cyber attack last autumn dropping out of the three-month window.

James Murray, Treasury chief secretary, said: "Growth only happens when the economy is on solid ground. That’s why in a changing world our plan to restore stability, boost investment and deliver reform is the right one to build a stronger, more resilient Britain."

However, with higher energy prices expected to push up inflation and interest rates also set to rise this year, it is important to remember that this data reflects the economic situation prior to the US-Israeli attack on Iran and the subsequent crisis in global trade and energy markets.

Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales (ICAEW), said: "February’s growth will have been followed by a more miserable March with skyrocketing fuel prices and supply chain chaos sparked by the Iran war likely to have stalled economic activity, despite an early Easter boost to sectors like retail."

What does economic growth mean for interest rates?

The Bank of England's Monetary Policy Committee (MPC) will next meet on 30th April 2026 to decide if the base rate of interest should change. At its last meeting on 19th March 2026, the MPC voted by a unanimous 9-0 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 April, but a 0.25 point increase by the end of the year is now fully priced in. The GDP data has not moved the needle on this, but the expected date for that increase has moved back from June to September since the ONS announcement.

Where will interest rates go in 2026?

The path for interest rates in 2026 will likely be shaped by events in the Middle East, but the performance of the UK economy will have a part to play, with continued economic growth potentially allowing the Bank of England to take a more hawkish approach to the base rate.

Internationally, the reopening of trade routes and a major de-escalation in the Middle East would dramatically change the global economic outlook and ease price pressures at home. In contrast, a resumption of attacks on energy production sites could mean a swift return to predictions of multiple rate hikes in 2026.

As we have seen in recent weeks and days, predictions have not lasted very long. However, we regularly update our article on the latest UK interest rate predictions, so you can stay up to date on where interest rates might go in the future.