UK economy grows 0.6% in Q1, but Iran conflict threatens recovery momentum

The UK economy expanded at a stronger pace in the first quarter of the year, offering signs of resilience before mounting geopolitical tensions and surging energy prices clouded the outlook for the months ahead.

Britain’s gross domestic product rose 0.6% in the January-to-March quarter, according to data released Thursday by the Office for National Statistics.

The economy also grew 0.3% in March alone.

The quarterly expansion matched economists’ expectations and marked an improvement from the 0.2% growth recorded in the final quarter of last year.

The stronger reading follows a revised 0.4% expansion in February and suggests the economy entered the second quarter with firmer momentum.

However, economists warned that the impact of the conflict in the Middle East is likely to weigh heavily on growth going forward.

Services sector drives growth

“Growth picked up in the first quarter of the year, led by broad-based increases across the services sector,” Liz McKeown, director of Economic Statistics at the ONS, commented on X on Thursday.

According to the ONS, all three major sectors of the British economy posted growth during the quarter.

Services output, which accounts for the majority of economic activity in the UK, increased 0.8%, while production output rose 0.2%.

Construction activity also returned to growth, rising 0.4% after weakness late last year.

McKeown noted that production “also grew slightly,” while the improvement in construction only partly offset earlier declines.

Britain’s economy has struggled to generate sustained momentum over much of the past two decades, facing repeated shocks ranging from the Covid-19 pandemic and the war in Ukraine to weaker business investment following the country’s exit from the European Union.

Still, the latest data showed the UK outperforming the US and several major European economies during the first three months of the year.

Energy shock clouds outlook

That resilience is now being tested by the fallout from the conflict involving Iran and the United States, which has disrupted global energy markets.

The effective closure of the Strait of Hormuz — a key maritime route that previously handled roughly 20% of global oil and gas shipments — has pushed fuel prices sharply higher and strained supply chains worldwide.

Britain, a net energy importer, has already experienced rising consumer prices linked to higher fuel costs during the conflict.

The Bank of England has warned that the extent of the economic damage will depend largely on how long the conflict lasts.

Markets increasingly expect the central bank to raise interest rates later this year in response to persistent inflation pressures.

Fergus Jimenez-England, associate economist at the National Institute of Economic and Social Research, said the first-quarter figures largely reflected conditions before the latest geopolitical deterioration.

“Although growth held up in March, there are signs of underlying weakness in the wake of conflict in the Middle East. Business confidence has taken a hit, input price inflation has risen, and job vacancies are falling,” he said in comments published by CNBC.

UK Chancellor Rachel Reeves defended the government’s economic approach following the release of the figures.

“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. Now is not the time to put our economic stability at risk.”