The UK economy delivered solid growth in the first quarter, but the figures offer only limited reassurance as attention shifts to higher energy costs, political uncertainty and pressure on gilt markets. With business investment still weak and fiscal policy risks rising, the recovery could face a more difficult test in the months ahead.
While the headline GDP number may provide some short-term comfort, much has changed since the end of March. Rising oil prices, concerns over inflation and renewed political instability are likely to weigh more heavily on market sentiment than backward-looking economic data.
Experts are reacting to the latest figures below:
Lindsay James, investment strategist at Quilter, said:
“March’s GDP figures suggest the UK economy entered the spring broadly in line with expectations at the quarterly level, but with the latest monthly data proving more resilient than many had feared. GDP grew by 0.3% over the month, holding up better than expected after February’s stronger reading, even as the economy expanded by 0.6% across the first quarter as a whole, driven by firmer performance in the services sector across the board.”
“However, expectations have shifted significantly since the outbreak of war and this resilience may start to be seriously tested. The IMF has cut its UK growth forecast from 1.3% to 0.8%, and the longer the Strait of Hormuz remains closed, the greater the risk that further downgrades to global growth follow. With global growth already revised down from 3.3% to 3.1%, the UK is unlikely to be sheltered from the fallout, particularly as an energy importer.
“For the government, this is a difficult backdrop. A decent first-quarter figure may provide some political breathing space, but higher energy costs and rising government bond yields all point to a more challenging few months ahead. The latest bout of speculation around Keir Starmer’s position has already caused a sharp move higher in gilt yields, underlining how little tolerance markets currently have for political uncertainty when the UK’s fiscal position is already so constrained.
“That leaves ministers with few easy options. Tax rises or spending restraint may become harder to avoid if market pressure persists, while any signs of wavering on fiscal discipline could risk further unease in the gilt market. Rachel Reeves is still viewed by many investors as an important anchor for confidence, but the rigidity of the fiscal rules means policy can too often be shaped by short-term moves in fiscal headroom rather than a long-term plan for sustainable growth.
“For investors, the concern is that a fragile domestic recovery is now meeting a much less forgiving global backdrop, at the same time as political risk is again being priced into UK assets.”
David Goebel, Associate Director, Investment Specialist at Evelyn Partners, the UK wealth manager, commented:
“UK GDP came in at a healthy 0.6% in the first quarter of this year, in line with expectations. The annualised figure surprised on the upside at 1.1% compared to expectations of 0.8%. The services sector was the standout driver, with the 3-month index of services rising 0.8% against an expectation of 0.6%, while manufacturing output also contributed positively.
“However, looking at more deeply at the composition of the number reveals some more causes for concern. Gross fixed capital formation fell 0.6% quarter-on-quarter, and business investment, while up 0.7% on the quarter, remains 1.8% lower year-on-year – a persistent signal of corporate hesitancy. Exports grew a modest 0.1%, while imports rose 0.6%, pointing to a drag from net trade.
“In recent years, early-year growth has tended to be front-loaded and followed by a slowdown, and there is a concern this year could follow in that pattern. With energy costs rising from the Iran conflict, which has kept Brent crude well above $100 a barrel, the impact in subsequent quarters will be marked. Full-year 2026 growth is currently estimated at just 0.8%, and could be much lower in the event of continued oil price escalation.
“The headline number offers a brief political reprieve for Chancellor Rachel Reeves amid the intensifying leadership crisis engulfing the government. With business investment still contracting on an annual basis and the Iran war casting a long shadow over the outlook, the government’s growth agenda remains unproven.”
George Lagarias, Chief Economist at Forvis Mazars:
“Upward surprises are always welcome, even if the data is historic and subject to revision. The good news lies in the economy outperforming consensus estimates for lower growth, and that it did so across most sectors. At 1.1% for the year to March, economic growth outpaced forecasts by 0.3%.
“The bad news is that this measurement is mostly behind us. We are already in the middle of the second quarter, where the impact of the closure of the Strait of Hormuz and higher inflation eating into growth will be more felt. Having said that, we can’t overlook either the resilience or the breadth of the British economy, especially in times of unusual global trade turbulence. We would not expect the good number to further increase the probabilities for rate hikes this year, as the Bank of England will likely be focusing on more current data.”
Luke Bartholomew, Deputy Chief Economist at Aberdeen Investments, said:
“While GDP growth was actually pretty solid over Q1, it is hard to see this mattering very much to markets given how much things have moved on since then in both international and domestic politics. Higher energy prices will weigh on growth, stunting any recovery that might otherwise have been occurring. And ongoing political uncertainty is likely to weigh on investment given the possibility of a significant change in fiscal policy. So the risk of a recession later this year is elevated, but for now the key driver of the gilt market is likely to be political developments rather than economic data.”
Colin Bradshaw, CEO at TwentyCi says:
“A stronger-than-expected GDP performance reinforces the picture of a UK property market that has so far remained more resilient than many anticipated. Given the current global backdrop, including continued instability in the Middle East, many expected confidence across housing and mortgage markets to deteriorate more sharply. Instead, our data continues to show a market that is still growing compared with 2024, although momentum has moderated in recent weeks.
There are still clear pressure points. Mortgage pricing volatility linked to higher swap rates has led to significant product repricing across the lending market, and many borrowers are once again facing fixed rates above 5%. Inflation risks are also reducing expectations of imminent interest rate cuts, keeping affordability under pressure.
At the same time, households are absorbing higher fuel and energy costs, while buyer enquiries softened during March before showing more mixed trends in April. We are also starting to see activity cool slightly in London and the South East.
However, the broader picture remains one of resilience. Buyers who are active in the market appear highly committed, and transaction volumes continue to hold up better than expected against a difficult economic backdrop. Our forecast remains 1.2 million transactions in 2026. While geopolitical risks remain elevated and conditions could shift quickly, the current evidence suggests the housing market is cooling gradually rather than entering a significant downturn.”
Rob Morgan, Chief Investment Analyst at Charles Stanley, part of Raymond James Wealth Management, said:
“The UK economy started the year with strong momentum, and following a buoyant first couple of months the higher fuel costs seen in March failed to knock it off course.
Overall, it’s encouraging that the economy grew 0.6% over the quarter with positive contributions across all three sectors, but with the UK finding itself at the mercy of global energy markets that may be as good as it gets for the rest of the year.
What is the economic outlook from here?
The consequences of the conflict in the Middle East are still unfolding, and following a good start to the year the UK economy could be stopped in its tracks. The sudden increase in global oil and gas prices threatens to reignite inflation, drain household finances, and squeeze company profits, which is set to put the skids under a buoyant start to the year.
If energy prices retreat, the UK economy could weather the storm reasonably well and even reaccelerate later in the year. But a higher plateau risks pushing the country towards an unwelcome cocktail of ‘stagflation’ – stubborn inflation and weaker growth – that dents both corporate performance and household budgets.”
Susannah Streeter, chief investment strategist, Wealth Club
“Despite the outbreak of war in Iran hitting sentiment, wallets and triggering deep uncertainty, the UK economy has shown surprising resilience. Growth of 0.3% in March hardly blows the lights out, but it confounds expectations, with the UK’s sturdiness surprising on the upside. A contraction had been expected. Instead, the huge services sector grew by 0.3%, while activity on construction sites continued to improve, with output rising 1.5%.
For the three months to March, the picture was even brighter, with growth of 0.6% for the economy as a whole and the services sector expanding by 0.8%. Upward revisions to earlier snapshots have helped paint a rosier picture of activity, as Budget uncertainty faded into the rear-view mirror and consumers and businesses became more confident. The slow but steady improvement, though, is likely to be upended by the energy crunch, with a long tail of repercussions expected. Nevertheless, the FTSE 100 is set to be on the front foot in early trade as investors cheer the more robust performance of the economy, amid hopes it has the strength to endure the fallout from the conflict a little better. Trade talks between Trump and Xi Jinping are also helping to lift optimism amid hopes Beijing could help prise open the door to a resolution to the conflict with Iran.
The more upbeat UK performance is also likely to be too little, too late for Prime Minister Sir Keir Starmer. Like the economy, he has been languishing under a lacklustre image, even though his premiership has brought stability to the UK after years of volatility, helping fuel a rebound in the FTSE 100.
But now the scale of the revolt by backbench MPs, and the prospect of a leadership challenge from Health Secretary Wes Streeting, is keeping headlines occupied and investors on edge. UK gilt yields have retraced from the multi-decade highs of 5.13% reached earlier this week, but they are likely to remain volatile as machinations in Westminster stay front of mind.”
Kevin Brown, savings expert at financial mutual Scottish Friendly, says:
“Given the headwinds facing the UK economy, it’s a surprise that it is managing to eke out any growth at all. The past two months have been tumultuous due to tensions in the Middle East and, as a highly open economy, the UK is particularly exposed to the fallout.
“When you add domestic political instability into the mix, it creates a toxic combination that drags on growth and discourages investment in the UK. The fact the economy still grew by 0.3% in March suggests that, despite everything, the UK economy remains resilient – even if growth is still falling short of the levels many would like to see.
“While tensions in the Middle East appear to have eased recently, recent history suggests households should continue to expect the unexpected. The best course of action is to make sure your finances are resilient enough to withstand a prolonged period of uncertainty. That means building a financial buffer and ensuring your money is working as hard as possible, whether that’s shopping around for a better savings deal or investing some spare cash for the potential of higher long-term returns.”
Richard Pike, sales and marketing director at Phoebus Software, said:
“However you view the latest figures, the UK economy is near stagnant with only modest growth since the start of the year, and uncertainty around interest rates and inflation levels confidence is in short supply. That said, most mortgage businesses I speak to are still doing great volumes. This uncertainty, including political instability in Westminster, has sent bond yields surging to near 20-year highs this week and sent the pound and equity markets falling. This will put pressure on the cost of capital across the economy, including mortgage rates. Although we have seen some product rate cuts recently, there’s a good chance that mortgage borrowing will become more expensive in the short term and put continued pressure on household finances. The country and the markets need the Government and the Bank of England to do all it can to steady the ship, but how achievable that is with the current incumbent in No 10 remains to be seen.”
Scott Gardner, investment strategist at J.P. Morgan Personal Investing, says:
“The UK economy started the year stronger in the first quarter as growth rebounded after a weak final quarter last year. The economy expanded more than expected in March, but growth was revised down in the previous months. While this is a positive start to the year, it’s difficult to see this first‑quarter momentum being sustained through the rest of the year with uncertainty rising at home and abroad.
“Beneath the surface, monthly GDP figures in March edged higher despite industrial production falling. The standout performance was in services activity which saw robust growth during the month, though industry data shows that new business activity has stalled amid the conflict in the Middle East. Consumption provided a further tailwind with stronger retail sales. Home sales have also provided a bright spot during the quarter which could strengthen in the next couple of months if buyers move quickly to finalise purchases before expected rate hikes later this year.
“The first quarter showed that strong UK economic growth is possible but many will be unconvinced that this momentum can be sustained throughout this year. The risk is that the energy price spike following the start of the Iran conflict will persist and lead to a rebound in inflation. This would be especially painful for businesses and consumers who have already faced years of higher prices and elevated interest rates.”
Guy Foster, chief strategist at RBC Brewin Dolphin said:
“The UK first quarter GDP was reasonably strong. Generally, households were in a strong position going into this year, having braced for economic hardship by a very downbeat narrative which had circulated ahead of last November’s Budget. The limited immediate impact, and largely deferred tax increases, meant that there was scope for some catch up spending which we saw over the quarter.
The eye-catching thing is the monthly data for March, as this was when the conflict in the Middle East had started. This data was relatively strong, suggesting that the effect of higher fuel costs did not immediately impact household’s broader spending. The basis of this strength was quite broad, with services providing the lion’s share, but there was also a positive contribution from the smaller construction sector.
The resilience of consumers may make it harder for the Bank of England to resist raising interest rates, and could bring June’s meeting into play, at the moment the market expects an interest rate increase in July.
However, as these figures don’t fit perfectly with more timely survey data, it could also create a dilemma for the Bank. As some more timely survey data, such as the reports of slowing retail sales, reflect the intuitive pressures on households when their non-discretionary costs rise.
The decline in this morning’s RICS house price balance shows that anticipated interest rate increases are already constraining the housing sector. However, this higher quality GDP data, which is received much later, suggests that consumers are holding up better. Ultimately, it should be the signs of second round effects such as accelerating wage growth, which determines how the Bank responds. But the same dilemma exists over whether to wait for higher quality data or respond to signals from surveys. Having missed the inflation target for most of the last few years, the MPC seems keen to err on the side of caution.”
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