Growth in the UK economy.
The UK economy grew 0.6% in the first quarter of 2026, the fastest in the G7, as March GDP rose 0.3% against forecasts of a 0.2% contraction. Chancellor Rachel Reeves cited the figures as evidence the government has “the right economic plan” and warned against “plunging the country into chaos” amid Labour leadership turmoil. Economists cautioned the war’s full effect will hit in the second quarter, with some predicting a mild recession.
However, on a monthly basis, the biggest downward effect on GDP growth was a 6.4% fall in travel agency and tour operator activities, suggesting the Middle East conflict was forcing consumers to reconsider holiday plans. The ONS said there were signs of front-loading in March, with some businesses citing activity brought forward in anticipation of cost increases because of the conflict.
Ruth Gregory, deputy chief UK economist at Capital Economics, said the economy performed “remarkably well” in the early stages of the energy price shock but that Q1 would “be the high point for the year given the effects of the war in Iran will sap growth from the second quarter.” In an adverse scenario, she said, “the economy suffers a mild recession.”
Yael Selfin, chief economist at KPMG, said the war’s adverse effect “is likely to show in the second quarter. We expect growth to slow, as higher costs and softer demand continue to weigh on activity.” Households are under renewed pressure as energy and petrol prices climb, she added, with food costs also expected to rise due to disruptions to fertilisers and other inputs.
Europlaz Technologies, a medical device manufacturer based in Essex, saw immediate price rises when the war broke out. Commercial director Rory O’Keeffe said polymer prices rose “5% to 10%” and that some suppliers “can’t confirm the price until the point of transaction.”
Looking at this from a statistical standpoint.
I remain unconvinced by the UK’s first quarter growth performance. GDP rose by 0.6%, up from 0.2% in the fourth quarter of 2025.
It follows a now-familiar pattern; since 2022, UK growth figures have come in much stronger in the first three months of the year than the rest. Growth has averaged 0.6% in Q1 over that period, a sharp contrast to Q3 where the economy has typically flatlined.
Why? It’s hard to say exactly what’s happening. But it seems that something’s not quite right with the way the data is being seasonally-adjusted, a legacy we suspect of higher inflation and the timing of annual price hikes. To its credit, the Office for National Statistics has confirmed today it has made some changes to previous years and is keeping its methods under review.
That’s not to say the UK economy didn’t grow at all in Q1. Surveys point to an underlying trend closer to 0.2-0.3%, which certainly isn’t terrible. Notwithstanding those seasonal issues, retail spending looks solid. The purchasing managers’ indices had a decent start to the quarter, too. I’m keeping a keen eye on IT, which contributed 0.3pp of the 1.2% year-on-year growth we saw in March, despite only having a 6% weight in GDP. That has been consistently the case and might point to some tailwinds from AI.
I know, for instance, that the UK is at the forefront of Europe’s efforts to build data centre capacity, though the evidence is mixed on exactly how much this is boosting Britain’s economy. A surge in industrial-related construction in the first half of 2025 has since reversed. When I look at import data, Britain hasn’t seen the surge in computer-related equipment that the US has experienced. One to watch this year.
Speaking of construction, this is another area that seems to have had a more stable first quarter after a horrendous end to 2025. Private housebuilding had a bit of a bounce in new work, as did commercial construction, though both are still 14% below January 2023 levels. This feels like a temporary bounce; forward-looking indicators on construction remain worrisome, compounded by the fresh pressure emerging on the property market.
That brings me to the key point, which is that the direction of the UK economy this summer has clearly changed for the worse over the past few weeks. Admittedly, a strong GDP reading for March sets a decent base for the second quarter; growth is likely to come in around 0.2-0.3%, before likely turning negative in the third quarter. Real disposable incomes are likely to fall, with inflation headed slightly above 4% this summer and wage growth stuck closer to 3%, and unemployment likely to increase further.
The big question is whether we’ll see a decent fall in the savings ratio to compensate. Our guess is we won’t see a significant change given consumer caution. I’m pencilling in annual growth of 0.8% for the UK this year, flattered by the strong Q1 that’s been confirmed today.
Today’s data won’t change much for the Bank of England, which is singularly focused on the impending inflation spike and the risk of it spilling into wage growth. I expect a one-and-done rate hike in June.