UK economy grows 0.6% in Q1 2026, defying Iran war impact

The UK economy grew 0.6% in the first quarter of 2026, the fastest pace in the G7, as March GDP rose 0.3% against analysts' forecasts of a 0.2% contraction, official data showed Thursday, offering a rare boost to Prime Minister Keir Starmer as he faces a leadership challenge.

The Office for National Statistics (ONS) said GDP rose 0.6% in the January-March period, up from a revised expansion of 0.2% in the final three months of 2025. The ONS revised Q4 2025 growth up to 0.2% from 0.1%. On a yearly basis, the economy grew 1% compared with the same quarter in 2025.

Chancellor Rachel Reeves hailed the figures as evidence the government has "the right economic plan." In a barbed reference to the Labour leadership turmoil, she warned against "plunging the country into chaos at a time when there is conflict in the world, but also at a time when our plan to grow the economy is starting to bear fruit."

The Iran war began on Feb. 28, 2026, with U.S.-Israeli strikes on Iran. The ONS said growth in the first quarter was "led by broad-based increases" across the services sector, which grew by 0.8%. Computer programming and advertising performed particularly well, while construction returned to growth, rising by 0.4%, although that was owing to repair and maintenance work rather than new work.

However, on a monthly basis, the biggest downward effect on GDP growth was a 6.4% fall in travel agency and tour operator activities, suggesting the Middle East conflict was forcing consumers to reconsider holiday plans. The ONS said there were signs of front-loading in March, with some businesses citing activity brought forward in anticipation of cost increases because of the conflict.

Ruth Gregory, deputy chief UK economist at Capital Economics, said the economy performed "remarkably well" in the early stages of the energy price shock but that Q1 would "be the high point for the year given the effects of the war in Iran will sap growth from the second quarter." In an adverse scenario, she said, "the economy suffers a mild recession."

Yael Selfin, chief economist at KPMG, said the war's adverse effect "is likely to show in the second quarter. We expect growth to slow, as higher costs and softer demand continue to weigh on activity." Households are under renewed pressure as energy and petrol prices climb, she added, with food costs also expected to rise due to disruptions to fertilisers and other inputs.

Europlaz Technologies, a medical device manufacturer based in Essex, saw immediate price rises when the war broke out. Commercial director Rory O'Keeffe said polymer prices rose "five to 10%" and that some suppliers "can't confirm the price until the point of transaction."

Shadow chancellor Mel Stride said "chaos surrounding the Labour leadership is destabilising Britain's economy," adding that borrowing costs hit their highest level in 30 years this week as leadership contenders promised more spending.

The Bank of England is expected to raise interest rates in response to rising inflation this year. However, deputy governor Sarah Breeden told the Financial Times on Thursday: "We can't wait forever, but we don't need to do it in June or July."

The IMF forecast last month that the UK would be the hardest-hit G7 economy from the Iran war. The latest data has not yet borne out that prediction, but economists cautioned the full effect will hit in the second quarter.