UK Economy Accelerated in February Before Iran Conflict Jolted Outlook

The UK economy expanded at a faster pace than expected in February, offering a snapshot of momentum just before geopolitical tensions disrupted the outlook. Gross domestic product rose 0.5% from the previous month, according to the Office for National Statistics, beating forecasts of 0.1% and marking the strongest reading in over a year.

Momentum before disruption The growth followed a modest but revised 0.1% increase in January and was driven primarily by the services sector, which extended its expansion to a fourth consecutive month. Output also increased in production and construction, making February the first month since mid-2025 in which all major sectors grew simultaneously. Within services, administrative and employment-related activities recorded particularly strong gains.

A turning point in late February That momentum has been overshadowed by events at the end of the month, when military escalation involving Iran disrupted global energy markets. The shock has pushed up oil and gas prices, tightened supply expectations, and introduced fresh volatility into financial markets. For the UK, which is sensitive to energy price swings, the timing has complicated an already fragile recovery.

Impact on households and policy Economists now expect inflation to rise sharply, potentially approaching twice the Bank of England’s 2% target. Higher energy costs are projected to leave typical households about £500 worse off, adding pressure to already stretched budgets. At the same time, borrowing costs are likely to remain elevated, limiting the government’s room to support growth or expand spending plans.

Sector and government implications The February data had offered support for the government’s economic strategy, particularly its focus on housing and services-led growth. Construction output was boosted by a 4.3% increase in private housing activity, aligning with plans to deliver 1.5 million new homes. That target now looks harder to achieve as rising material and financing costs weigh on developers.

Broader economic signals Business surveys are already pointing to strain. Private-sector data indicate a mix of strong wage pressures and rising input costs, conditions consistent with stagflation. Companies report passing on higher raw material and energy expenses, while also facing difficulty maintaining margins. The Bank of England’s own surveys show firms preparing to increase prices further in response to the shock.

What comes next Despite the worsening outlook, economists still expect the UK to post around 0.3% growth in the first quarter, which would be the fastest pace in a year. Policymakers now face a difficult balance ahead of the Bank of England’s next meeting: whether to prioritize controlling inflation or supporting growth. Much depends on the trajectory of the Middle East conflict and whether energy markets stabilize. A prolonged disruption would deepen the squeeze on households and increase the risk of a broader economic slowdown.