The Financial institution of England now faces a tough balancing act, signalling potential rate of interest hikes to fight this “power provide shock”.
Chancellor Rachel Reeves will probably be tickled pink on the information (Picture: Getty)
The UK economic system grew by a shocking 0.3% in March 2026, contributing to a strong 0.6% enlargement for the primary quarter regardless of the geopolitical shock of the battle in Iran. Development was primarily fuelled by the companies and manufacturing sectors, which expanded by 0.5% and 1.2% respectively, efficiently offsetting a 2.0% contraction within the struggling development trade.
Nevertheless, the optimistic output was dampened by a pointy rise in inflation to three.3%, pushed by the most important single-month spike in gasoline costs in three years following the closure of the Strait of Hormuz. The Financial institution of England now faces a tough balancing act, signalling potential rate of interest hikes to fight this “power provide shock” whereas making an attempt to guard the economic system from a predicted slowdown in enterprise funding. Whereas the UK displayed surprising resilience in early 2026, analysts have trimmed annual progress forecasts to 0.6% because the long-term affect of world instability begins to weigh on the nationwide outlook.
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Sir Keir Starmer is dealing with a probable management problem (Picture: Getty)
Along with the output figures, family consumption elevated by 0.6% throughout the quarter, offering a big enhance to the expenditure measure of GDP.
Enterprise funding additionally confirmed surprising energy, rising by 0.9% as companies continued to modernize operations regardless of the risky worldwide local weather.
On the manufacturing aspect, manufacturing was a standout performer, increasing by 1.4% attributable to excessive demand for transport tools and chemical merchandise.
Authorities spending contributed additional to the enlargement with a 0.3% rise, largely pushed by elevated exercise in well being and schooling companies.
Lastly, the ONS confirmed that actual GDP per head grew by 0.4% on this interval, marking a optimistic shift for particular person financial output after a chronic interval of stagnation.
Rachel Reeves warns of financial challenges from Iran warfare
ONS director of financial statistics Liz McKeown mentioned: “Development picked up within the first quarter of the 12 months, led by broad-based will increase throughout the companies sector.
“Inside that wholesale, pc programming and promoting carried out notably nicely.
“Manufacturing additionally grew barely, whereas development returned to progress, although solely partly reversing weak spot on the finish of final 12 months.”
Posting on X, Ms Reeves mentioned: “In the present day’s sturdy progress figures present the Authorities has the best financial plan.
“The alternatives I’ve made as Chancellor imply our economic system is in a stronger place as we cope with the prices of the warfare in Iran.”
In the present day’s sturdy progress figures present the Authorities has the best financial plan.
The alternatives I’ve made as Chancellor imply our economic system is in a stronger place as we cope with the prices of the warfare in Iran.
Now is just not the time to place our financial stability in danger.
— Rachel Reeves (@RachelReevesMP) Might 14, 2026
In a attainable reference to the looming leadship battle she added: “Now is just not the time to place our financial stability in danger.”
However, Sir Mel Stride MP, Shadow Chancellor of the Exchequer, highlighted the elevated price of borrowing.
He warned: “The chaos surrounding the Labour management is destabilising Britain’s economic system.
“This week, borrowing prices hit their highest degree in 30 years as Labour management contenders competed to vow much more spending, borrowing and fantasy economics.
“Solely the Conservatives have a critical plan to Get Britain Working Once more and to repair the general public funds via our Golden Financial Rule.”
Shadow Chancellor Mel Stride (Picture: Getty)
George Brown, Senior Economist at Schroders, sounded a word of warning.
He mentioned: “UK GDP has developed a behavior of beginning the 12 months nicely, just for momentum to sluggish attributable to residual seasonality.
“Markets suppose the Financial institution of England (BoE) will place extra weight on inflation than progress dangers. We’re not so certain.
“Subdued home demand ought to diminish the danger of second-round results from larger power costs.
“That ought to imply the BoE talks robust however stops wanting the hikes markets are pricing in.”
Mike Randall, CEO at Merely Asset Finance, claimed: “An uptick in each month-to-month and quarterly GDP means that the UK economic system defied expectations within the first quarter, with companies persevering with to indicate resilience regardless of ongoing price pressures.”
“If these figures present us something, it’s that progress can survive below strain – but it surely can’t be taken as a right.
“With the UK on the precipice of but extra political change, the Authorities should prioritise the wants of rising UK companies to keep up this momentum and provides them the boldness they should make investments – no matter who could also be sat across the desk within the months forward.”
Suren Thiru, Chief Economist with the Institute of Chartered Accountants in England and Wales (ICAEW), felt an rate of interest reduce remained unlikely.
He defined: “This sturdy first quarter might be the excessive level for the economic system this 12 months with output prone to halve in Q2 as surging power prices suffocate exercise, regardless of a short-term enhance from companies stockpiling in anticipation of shortages and worth rises.
“A chronic interval of home political instability would solid one other darkish cloud over the UK’s financial outlook by additional denting confidence and rising monetary market turbulence, seemingly leading to notably weaker spending and funding.
“Although these figures could reinforce the extra hawkish stance amongst rate-setters brought on by the Iran warfare, a June charge rise nonetheless appears unlikely given lingering uncertainty over the battle’s affect and hope {that a} weaker economic system will ultimately assist restrict inflation.”
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