The UK economy grew 0.5% in February, the Office for National Statistics said, surprising economists and marking the strongest monthly expansion since mid-2023. Services firms were the main engine, while production and construction also contributed, putting quarterly growth at 0.5% for the three months to February. Officials and market watchers warned the improvement arrives before a sharp rise in energy prices linked to the Middle East conflict, a development that may test the durability of the rebound and influence Bank of England policy.

What the numbers show The Office for National Statistics reported a 0.5% increase in gross domestic product for February, and the same 0.5% rise for the three months to February, figures that exceeded many economists' expectations. Growth in services was the clearest driver, with production also up 0.5% and construction rising by about 1.0% in the month. The ONS highlighted gains in wholesaling, market research, hospitality and publishing, and it noted that car production recovered after earlier disruption. That pattern contrasts with the patchy performance of the recent past. The economy has expanded in only a minority of recent months, and the broader trend before February remained sluggish. Where activity picked up ONS chief economist Grant Fitzner said growth in the three months to February was led by “broad-based increases across services.” He singled out hospitality and market research as notable contributors. Car manufacturing, which had been hit by a cyber incident and supply problems in the autumn, showed signs of a rebound and helped the production numbers. The ONS also pointed to continued weakness in some areas: construction had been weaker over longer stretches and there were falls in leasing and intellectual property licensing that partially offset the gains. Energy shock and the policy backdrop Economists immediately flagged the timing of the data: the stronger-than-expected reading captures activity before energy markets moved sharply higher after late February. Both ONS commentary and independent economists linked the recent surge in oil and gas prices to escalation of the conflict in the Middle East, increasing the risk of renewed inflationary pressure. Independent forecasters said the energy shock had probably unsettled the momentum shown in February and implied another year of above-target inflation and a softer labour market. That view echoed market pricing that, for a time, put at least one further Bank of England rate rise back on the table. Economists' debate and seasonal adjustment Some forecasters emphasised technical issues that might exaggerate short-term swings. James Smith, an economist at ING, said seasonal adjustment and the timing of price changes can make a bounce look larger than it is, and that February or March were plausible months for a rebound after earlier weakness. The ONS rejected suggestions its seasonal adjustment process was incorrect; an ONS spokesperson said statisticians had reviewed the methods thoroughly. Meanwhile the International Monetary Fund has already trimmed growth forecasts for the UK among major economies, an outcome the IMF linked largely to the effect of the Iran war on energy markets. That downgrade set a backdrop of heightened vulnerability even before the latest monthly figures were released. Political and market reactions The stronger reading will be welcomed by the finance minister, Rachel Reeves, because it implies a firmer start to the year for public finances. At the same time, officials and markets must weigh the short-term relief against the cost of higher energy and the lift to inflation that typically follows. Markets responded by reassessing the Bank of England outlook. Some investors moved to price in a possibility of at least one further rate increase as the direct effect of higher energy prices feeds through to consumer prices, while others took the data as evidence that demand remained resilient despite recent headwinds. Who is affected and how Households and businesses feel the two forces at work: a modest pickup in services activity and the countervailing squeeze from energy bills. Consumers benefit where hospitality and retail activity pick up, but higher fuel and heating costs erode real incomes. Firms in sectors with pricing power—some hospitality and consumer-experience businesses—may be better placed to offset rising input costs than those operating on thinner margins. The labour market will be an important channel. If firms face higher costs but sustained demand, they may keep hiring; if costs outpace revenues, employment could soften. Both outcomes carry implications for wage growth and, therefore, for the inflation path the Bank of England monitors closely. Regional and trade implications While the ONS release covers the whole UK, gains in services and manufacturing are concentrated in areas with a strong services base and car supply chains. The trade picture complicates matters: separate official data indicated the trade deficit widened when volatile precious metal movements are excluded, a factor that will affect GDP components and the external demand contribution to growth. For a country reliant on energy imports, a global rise in oil and gas prices lifts both consumer prices and import bills, pressuring the current account and public finances at the same time. Policy choices ahead The Bank of England faces a policy trade-off. Stronger activity limits the case for cutting interest rates, while higher energy costs push inflation up and may prompt the central bank to keep policy tighter for longer. Markets and some economists have already priced at least one additional tightening; policymakers now have to judge whether the February strength is durable or a temporary bounce ahead of the full pass-through from energy costs. Chancellor and Treasury officials will track tax receipts and welfare spending. If growth proves sustained, revenue forecasts improve. If energy-driven inflation persists, higher benefits spending and real-income pressure may offset any short-term fiscal gains. What this means The 0.5% monthly rise and 0.5% quarterly figure show the UK economy had more momentum at the start of the year than many forecasters expected.

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Markets have already moved to price in at least one further Bank of England rate rise as higher energy costs feed through to consumer prices; the February rebound therefore offers only a partial reprieve unless growth endures once the energy-price shock fully works through the economy.

This article was created with AI assistance.