The UK economy expanded by 0.6 percent in the first quarter of 2026, according to the latest gross domestic product (GDP) figures, providing a boost for Chancellor Rachel Reeves after days of economic turbulence. The growth comes as Prime Minister Keir Starmer faces a deepening leadership crisis, with the pound falling and investors selling government bonds amid ministerial resignations and calls for his resignation.
Stronger-than-expected performance
Most economists had predicted a 0.2 percent contraction in March, following 0.5 percent growth in February. However, the overall quarterly figure was lifted by stronger performance in January and February, resulting in 0.6 percent growth between January and March. The data offers some respite for the government, which has been grappling with political instability and external shocks.
Impact of the Iran conflict
The positive GDP figures mask growing concerns over the impact of the escalating conflict in the Middle East. EY's economic outlook warns that UK consumer spending growth could grind almost to a halt. If the Iran war intensifies and the Strait of Hormuz remains closed for the rest of the year, growth could plunge to just 0.3 percent in 2026.
Under EY's central forecast, inflation is expected to peak at 4 percent by the end of 2026, keeping interest rates at 3.75 percent for the remainder of the year. Unemployment is projected to rise to 5.8 percent as weaker growth affects hiring decisions.
Peter Arnold, EY's UK chief economist, commented: "Despite a relatively strong start to 2026, the conflict in the Middle East means the UK economy is once again being shaped by external shocks and on track for another year of subdued growth." He added that energy supply constraints will push inflation higher and delay interest rate cuts, increasing borrowing costs for businesses and prompting some companies to reassess spending plans.
The economic outlook remains uncertain, with the government facing both political headwinds and the risk of further disruption from global events.
