UK economy surged ahead of Iran war, but energy shock to test resilience

LONDON: Britain’s economy put on a burst of growth in February, suggesting it was in slightly better shape before the start of the Iran war than many economists had feared, official figures showed on Thursday.

Gross Domestic Product (GDP) expanded 0.5% month-on-month in February, the biggest increase since ​January 2024, the Office for National Statistics said. Economists polled by Reuters had forecast a much more modest ​reading of 0.2%.

While the figures are likely to cheer UK Finance Minister Rachel Reeves, economists said Britain ⁠remained vulnerable to the fallout from the Middle East conflict, being highly dependent on imported energy and prone to higher ​inflation than peers.

“Unfortunately, the latest energy price shock has likely pulled the rug on this momentum, with another year of above-target ​inflation and a softening labour market likely to come,” said Fergus Jiminez-England, associate economist from the National Institute for Economic and Social Research.

The UK suffered the sharpest cut to economic growth forecasts for large rich economies by the International Monetary Fund due largely to the Iran war, in ​forecasts published on Tuesday.

SERVICES SECTOR SPURRED FEBRUARY ECONOMIC GROWTH

“Growth increased further in the three months to February led by broad-based ​increases across services,” ONS chief economist Grant Fitzner said.

“Meanwhile car production recovered from the effects of the autumn cyber incident.”

Economic growth for the three ‌months ⁠to February was 0.5%, the ONS said, putting the UK’s economy on track for a conspicuously strong first quarter, for a third year running.

That pattern has led to suspicions among some economists that the ONS’ process of seasonal adjustment has gone awry following unusually large swings in output during the COVID-19 pandemic – something the ONS rejects.

“We’re confident in our figures and seasonal adjustment ​processes,” an ONS spokesperson said ​on Thursday, adding that ⁠statisticians had looked thoroughly at the issue.

James Smith, economist at ING, said he still doubted whether the ONS had fully accounted for the influence of the last period of high inflation ​in its seasonal adjustment process, and the timing of price increases.

“We wrote in our reaction ​to the ⁠January data that February or March could see a strong bounce back for exactly this reason,” Smith said.

“Suffice to say, all of this is old news anyway, given the crisis we find ourselves in today.”

Separate ONS data showed Britain’s total trade deficit, excluding ⁠the volatile ​movements of precious metals, rose in inflation-adjusted terms in February to 5.627 ​billion pounds ($7.62 billion), its highest since November 2024.

The widening was driven by imports rising to their second-highest reading on record, after December 2022.