The U.K. Economy expanded by 0.5% in February, according to preliminary data from the Office for National Statistics released Thursday. This growth significantly outperformed Reuters economist polls, which had projected a modest 0.1% monthly increase.
Construction led the rebound with a 1% increase, while both production and services sectors grew by 0.5%. This follows a sluggish January where the economy grew by only 0.1%, though initial ONS estimates had suggested the period flatlined entirely.
Military operations in Iran render February data stale
Analysts warn the February “bumper” growth is likely irrelevant now. The U.S. And Iran launched military operations against Iran on Feb. 28, fundamentally altering the economic environment after the data was collected.
George Brown, senior economist at Schroders, told CNBC he isn’t sure the figures reflect actual conditions. He suggested residual seasonality might have skewed the data and noted that a deteriorating labor market, with unemployment rising above 5%, contradicts the optimistic GDP print.
Ruth Gregory of Capital Economics believes the Iran war has probably already extinguished the growth seen in February. She noted, however, that energy-intensive sectors like retail, transport, and mining performed well just before the conflict.
Energy price shocks threaten inflation targets
As a net importer of energy, the U.K. Is highly vulnerable to the current stranglehold on oil and gas exports from the Middle East. Petrol and diesel prices have already climbed sharply since the war began.
Heating oil users are facing steep cost increases. Households under the Ofgem energy price cap remain shielded from these spikes until July.
This volatility threatens the Bank of England’s 2% inflation target. Economists now expect March inflation to accelerate to 3.3%, up from 3% in February.
Mortgage markets react to shifted rate expectations
The Bank of England was expected to cut interest rates as inflation cooled. That expectation has vanished. Speculation now suggests rates will either hold steady or rise this year to combat renewed inflation pressures.
Lenders have already reacted by pulling hundreds of mortgage deals. Average rates have climbed to levels not seen since last spring and summer.
Patrick O’Donnell of Omnis Investments expects the Bank of England to “sit on their hands” during the next meeting at the end of the month. He argues the February GDP data will have minimal impact on policymakers given the high level of uncertainty.
How the ONS calculates monthly GDP
Monthly GDP estimates rely solely on the output measure, unlike quarterly estimates which average output, income, and expenditure. The primary data source is the Monthly Business Survey.
The ONS measures Gross Value Added (GVA) by subtracting intermediate consumption from an industry’s output. Because intermediate consumption is only collected annually, monthly estimates use deflated turnover or volume estimates of output as a proxy.
Accuracy for these growth rates is limited to one decimal place. The ONS advises against using further decimal places to determine direction when growth is near zero due to increasing uncertainty.
Why is the IMF more pessimistic about the U.K. Than other economies?
The IMF warned that the U.K. Could face the biggest hit to growth of any major economy resulting from the Iran war, leading them to cut the 2026 growth forecast from 1.3% to 0.8%.
What specific sectors are classified as consumer-facing services?
According to the UK Standard Industrial Classification, this includes retail and wholesale trade, motor vehicle repair, rail transport, accommodation, food and beverage services, gambling, sports, and veterinary activities, among others.
