By Ed Frankl


The U.K. economy grew for the second straight month in February, but any long-awaited recovery will likely be derailed by the conflict in the Middle East, which has pushed energy prices sharply higher.

U.K. gross domestic product growth was 0.5% in the middle of the first quarter, compared with 0.1% in January, the Office for National Statistics said Thursday. A consensus of economists polled by The Wall Street Journal last week anticipated a 0.1% expansion. Month-on-month growth was last stronger in June 2023, when it was 0.6%.

The February surprise was particularly welcome because the British economy had only expanded in four of the prior seven months, extending a long period of sluggishness that stretches back to the global financial crisis.

However, it came before the economy suffered the effects of a jump in energy prices that followed the U.S. and Israeli attacks on Iran. Brent crude and European benchmark gas prices have both risen more than 30% since the strikes on Feb. 28.

"The U.K. economy performed strongly in February, but the recovery will likely be short-lived," said Yael Selfin, chief economist at KPMG U.K., in a note to clients.

"We expect higher energy costs and supply-chain disruptions to weigh on growth for much of the second quarter of this year," she said.

The Bank of England expects inflation to be higher than previously anticipated, and the impact will be greater the longer the war and its effect on the global energy supply last. The central bank kept its key rate at 3.75% last month. Investors expect at least one rate hike this year, LSEG data showed, flipping expectations before the war that borrowing costs would ease in 2026.

The surge in energy costs is a fresh blow to the U.K. economy to come from outside its borders. Activity late last year was buffeted by the higher tariffs imposed by President Trump. The ONS on Thursday revised down quarterly growth in both the third and fourth quarter of 2025 to zero, from 0.1% beforehand.

The International Monetary Fund on Tuesday lowered its forecast for U.K. growth this year to 0.8% from 1.3%, the largest downward revision for an advanced economy.

The IMF cited the U.K.'s higher reliance on imported gas and expectations of fewer interest-rate cuts as reasons for the downgrade. Inflation is set to continue to pick up toward 4% this year before returning to the Bank of England's 2% target by the end of 2027, as higher energy prices fade and a weakening labor market puts a dampener on growth, the IMF said.

The prospect of a fresh slowdown after signs of revival has caused frustration in the U.K. government, with treasury chief Rachel Reeves calling the U.S. and Israeli attacks on Iran a mistake, and urging de-escalation.

"This is a war that we did not start. It was a war that we did not want. I feel very frustrated and angry that the U.S. went into this war without a clear exit plan, without a clear idea of what they were trying to achieve," she told British newspaper the Mirror this week.

The war dents economic momentum the government would have been hoping to demonstrate ahead of local elections in May, as populist rivals from both the left and right poll strongly. Prime Minister Keir Starmer came to power in 2024 putting economic growth at the top of his agenda for government.

Surveys suggest the U.K. economy has slowed since the outbreak of the war. U.K. private-sector activity grew at the slowest pace for six months in March, according to an S&P Global Purchasing Managers Index. Momentum slowed in the services sector, and there was a renewed downturn in manufacturing production, it noted.

The good news is that Britain entered the energy shock on a stronger footing than many expected, Sanjay Raja, Deutsche Bank's chief U.K. economist, said in a note.

In February, services output and industrial production both grew 0.5%, while construction activity rose 1.0%, the ONS data showed. Of the 14 subsectors of services, only one, accommodation and food services, saw a monthly decline.

"The bad news is that upward GDP momentum won't last. This will likely be the growth before the energy squeeze. Households will have already started to feel the impact of the Iran energy shock, impacting disposable incomes and discretionary spending," Raja said.

"As such, expect more sluggish growth into the second quarter and beyond."


Write to Ed Frankl at edward.frankl@wsj.com


(END) Dow Jones Newswires

04-16-26 0511ET