UK records strong growth but Iran war casts shadow
The British economy grew unexpectedly in March, capping another strong first quarter; which suggests the economy is doing better as the Iran war escalates more than many feared; However, economists say that seasonal distortions affect the figures positively.
The Office for National Statistics (ONS) said gross domestic product rose 0.3 per cent on a monthly basis in March; This corresponded to expectations of a 0.2 percent contraction in a Reuters poll of economists.
The services sector, construction production and manufacturing showed strong growth.
The economy grew by 0.6 percent in the entire first quarter; This represents a third year of remarkably strong growth in the first quarter.
Economists have said measurement problems with changes in spending after the pandemic may contribute to this pattern.
Raj Badiani, economic director at S&P Global Market Intelligence, said that the stockpiling of goods triggered by the Iran war may have also pulled demand forward in March.
“However, recession risks have increased and we now expect the UK economy to contract slightly in the second and third quarters of this year,” Badiani said, pointing to the upcoming increase in inflation resulting from high oil prices and the pressure on the Bank of England to increase interest rates.
Partial spending data for April “points to some weakening in the second quarter”, the ONS said.
It remains to be seen how renewed uncertainty at Westminster will weigh on the economic outlook, with investors now uncertain about Prime Minister Keir Starmer’s political future.
The ONS published a blog on Thursday acknowledging there may be post-pandemic changes in the timing of spending in the economy and said it was keeping its methods under review.
As a result, it lowered its growth forecasts for the first quarter of 2024 and 2025.
“Something seems off with the seasonal adjustment of data, a legacy we suspect is due to high inflation and the timing of annual price increases,” said ING economist James Smith.
“Today’s data won’t change much for the Bank of England, which is particularly focused on the impending rise in inflation and the risk of this spilling over into wage growth.”
A Reuters poll of economists showed the Bank of England will keep borrowing costs at 3.75 per cent in 2026; But more than a third expect at least one rate hike as the Iran war fuels an energy price rise that has raised inflation forecasts.
Financial markets, by contrast, have priced in increases of two to three quarter points in 2026.
Finance Minister Rachel Reeves said the data showed she had the right economic plan.
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