UK Economy Grows as Expected Before Iran War Impact

  • Britain's economy grew 0.6% in the first quarter of 2026, in line with the Office for National Statistics' (ONS) initial estimate, but households were squeezed even before the worst effects of the U.S.-Iran conflict started to feed through. Services were the main driver of growth, supported by computer programming, wholesale and advertising, partly offset by declines in rental companies and recruitment agencies.
  • The first-quarter expansion marked the third consecutive year of strong Q1 growth, although the ONS said it continues to monitor concerns over potential seasonality in the data after reiterating that its review found no statistically significant seasonality.
  • Despite the stronger economic growth, households were squeezed even before the worst effects of the U.S.-Iran conflict began to feed through. Real household disposable income per head contracted 0.8% in the first quarter, while the household savings ratio fell 0.7 percentage points to 8.9%, driven by lower non-pension savings.
  • The economic outlook remains challenging, with business surveys and April economic data pointing to weaker momentum. Economists expect Britain's next prime minister, Andy Burnham, to inherit a difficult fiscal position, with tighter financial conditions, softer household spending and economic uncertainty expected to weigh on investment.
  • The ONS revised fourth-quarter 2025 GDP growth down to 0.1% from the previous estimate, while full-year 2025 growth was revised to 1.3% from 1.4%. Looking ahead, the Bank of England's decision to keep interest rates at 3.75%, combined with investors pricing in a 25-basis-point rate increase by February 2027, is expected to prolong pressure on households.
  • While first-quarter growth remained resilient, Reuters notes that much of the data predates the full impact of the U.S.-Iran conflict. Softer household spending, tighter financial conditions and elevated uncertainty suggest growth is likely to moderate in the coming quarters despite the strong start to 2026.

(Source: Reuters)