Rachel Reeves handed lifeline as GDP increases 0.6%

The UK economy grew by a surprising 0.3% in March 2026, contributing to a robust 0.6% expansion for the first quarter despite the geopolitical shock of the conflict in Iran. Growth was primarily fuelled by the services and production sectors, which expanded by 0.5% and 1.2% respectively, successfully offsetting a 2.0% contraction in the struggling construction industry.

However, the positive output was dampened by a sharp rise in inflation to 3.3%, driven by the largest single-month spike in fuel prices in three years following the closure of the Strait of Hormuz. The Bank of England now faces a difficult balancing act, signalling potential interest rate hikes to combat this "energy supply shock" while attempting to protect the economy from a predicted slowdown in business investment. While the UK displayed unexpected resilience in early 2026, analysts have trimmed annual growth forecasts to 0.6% as the long-term impact of global instability begins to weigh on the national outlook.

In addition to the output figures, household consumption increased by 0.6% during the quarter, providing a significant boost to the expenditure measure of GDP.

Business investment also showed unexpected strength, rising by 0.9% as firms continued to modernize operations despite the volatile international climate.

On the production side, manufacturing was a standout performer, expanding by 1.4% due to high demand for transport equipment and chemical products.

Government spending contributed further to the expansion with a 0.3% rise, largely driven by increased activity in health and education services.

Finally, the ONS confirmed that real GDP per head grew by 0.4% in this period, marking a positive shift for individual economic output after a prolonged period of stagnation.

ONS director of economic statistics Liz McKeown said: “Growth picked up in the first quarter of the year, led by broad-based increases across the services sector.

“Within that wholesale, computer programming and advertising performed particularly well.

“Production also grew slightly, while construction returned to growth, though only partly reversing weakness at the end of last year.”

Posting on X, Ms Reeves said: "Today’s strong growth figures show the Government has the right economic plan.

"The choices I have made as Chancellor mean our economy is in a stronger position as we deal with the costs of the war in Iran."

In a possible reference to the looming leadship battle she added: "Now is not the time to put our economic stability at risk."

Nevertheless, Sir Mel Stride MP, Shadow Chancellor of the Exchequer, highlighted the increased cost of borrowing.

He warned: “The chaos surrounding the Labour leadership is destabilising Britain’s economy.

“This week, borrowing costs hit their highest level in 30 years as Labour leadership contenders competed to promise even more spending, borrowing and fantasy economics.

“Only the Conservatives have a serious plan to Get Britain Working Again and to fix the public finances through our Golden Economic Rule.”

George Brown, Senior Economist at Schroders, sounded a note of caution.

He said: "UK GDP has developed a habit of starting the year well, only for momentum to slow due to residual seasonality.

"Markets think the Bank of England (BoE) will place more weight on inflation than growth risks. We are not so sure.

"Subdued domestic demand should diminish the risk of second-round effects from higher energy prices.

"That should mean the BoE talks tough but stops short of the hikes markets are pricing in.”

Mike Randall, CEO at Simply Asset Finance, claimed: “An uptick in both monthly and quarterly GDP suggests that the UK economy defied expectations in the first quarter, with businesses continuing to show resilience despite ongoing cost pressures.”

“If these figures show us anything, it’s that growth can survive under pressure – but it cannot be taken for granted.

"With the UK on the precipice of yet more political change, the Government must prioritise the needs of growing UK businesses to maintain this momentum and give them the confidence they need to invest – regardless of who may be sat around the table in the months ahead.”

Suren Thiru, Chief Economist with the Institute of Chartered Accountants in England and Wales (ICAEW), felt an interest rate cut remained unlikely.

He explained: "This strong first quarter is probably the high point for the economy this year with output likely to halve in Q2 as surging energy costs suffocate activity, despite a short-term boost from firms stockpiling in anticipation of shortages and price rises.

“A prolonged period of domestic political instability would cast another dark cloud over the UK’s economic outlook by further denting confidence and increasing financial market turbulence, likely resulting in notably weaker spending and investment.

“Though these figures may reinforce the more hawkish stance among rate-setters caused by the Iran war, a June rate rise still looks unlikely given lingering uncertainty over the conflict’s impact and hope that a weaker economy will eventually help limit inflation.”