UK economy showed surprise 0.5% growth before Iran war – analyst reaction

UK economy showed surprise 0.5% growth before Iran war – analyst reaction

Daniela Hathorn. Senior Market Analyst, Capital.com

“The latest UK data suggests an optimistic start of the year, but it paints a more nuanced picture than the headline suggests. On the surface, February’s 0.5% monthly GDP growth was a clear upside surprise versus expectations of around 0.1%, marking a sharp rebound from the flat or near-flat readings seen in prior months. This strength was broad-based, with contributions from services, production and construction, indicating that momentum had started to build before the geopolitical shock from the Iran conflict took hold.

However, the key point is that this strength is likely backward-looking rather than trend-defining. The UK economy had been running at a very subdued pace heading into the year, with growth hovering around zero in previous months. This makes February’s jump more of a rebound from weakness than the start of a sustained upswing. In other words, the economy is still fragile, and a single strong print does little to change that broader narrative.

More importantly, the timing matters. February data reflects an economy before the full impact of the energy shock from the Middle East conflict filtered through. Since then, oil and gas prices have surged, financial conditions have tightened, and growth expectations have been revised lower. That means February’s strength is unlikely to be sustained. There will need to be more strong reading in the coming months in order to consider this a positive trend in growth, which seems unlikely as the UK is a net energy importer, making it more vulnerable to rising global prices. So, while the latest figures offer a welcome surprise, markets are likely to look through them, focusing instead on how the economy performs in the coming months as higher energy costs and tighter conditions are expected to weigh on demand.”

Kenny MacAulay, CEO of accounting platform Acting Office said:

“These are pre-Iran figures and bear no indication on the reality of the situation now. Make no mistake, the Middle East crisis will continue to send shockwaves around the global economy, with Britain facing a particularly rough ride due to sticky inflation.”

Raj Abrol, CEO of risk platform Galytix said: “Better than expected growth is very welcome, but the Middle East crisis will continue to have a knock-on effect on the UK economy. What started as a conflict in the Middle East is now showing up in borrowing costs right across the economy. Mortgage rates have jumped from 4.8% to over 5.5% — that’s an extra £1,000 a year on a typical £200,000 mortgage.

The ongoing turmoil of Iran crisis has spooked many of the big banks, leading to a surge in mortgage rates and increased pressure on homeowners. Against this complex backdrop, a rise in defaults could well continue for many months as inflation persists and cost of living crisis worsens. The longer this uncertainty continues, lenders will continue to remain risk averse, making access to credit a bigger challenge for consumers.

The cost of short-term corporate borrowing has more than doubled for lower-rated firms since late February, investment-grade credit spreads have widened 15 basis points, and UK gilt yields have hit 5% for the first time since 2008. When credit gets more expensive across the board, it doesn’t just hit homeowners. It hits businesses funding payroll, SMEs trying to refinance, and consumers whose credit cards and car loans quietly reset higher. With a million fixed-rate deals expiring by September and inflation heading towards 3.5%, the longer this goes on, the more defaults move from a slow creep to something banks have to take seriously.”