UK economy sees surprise growth in March despite Iran war

7 minutes agoEmer MoreauBusiness reporter

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The UK’s economy saw surprise growth in March, despite the month seeing the first impact of the Iran war.

The economy grew by 0.3%, confounding analysts’ forecasts of a small contraction, although the impact of the conflict is expected to hit growth later this year.

The Office for National Statistics (ONS) said there were signs that consumers and businesses brought forward spending in March due to fears over future price rises brought about by the war.

Chancellor Rachel Reeves said the figures showed the government had “the right economic plan”, but warned a Labour leadership contest risked “plunging the country into chaos”.

Economic growth in the first three months of the year was 0.6%, the ONS said, led by a rebound in areas such as retailing and construction.

The statistics body said there had been signs of so-called front-loading in March, with some businesses it surveyed “cited activity being bought forward in anticipation of increases in costs because of conflict in Iran”.

The ONS also said retailers had reported that motorists were stocking up on fuel as prices rose sharply.

Yael Selfin, KPMG’s chief economist, said the impact of the Iran war on the economy was likely to be more pronounced in the second quarter of the year.

“Households are under renewed pressure as energy and petrol prices climb. Food costs are also expected to rise, with disruptions to fertilisers and other essential inputs,” she said.

“These increases are likely to weigh on disposable incomes, dampening demand and posing a significant challenge to economic activity over the coming months.”

‘Everything’s going up’

Siblings Kennedy and Boston Mace run a play centre in Chelmsford, Essex. They have noticed how families are having to cut down on spending and interrogate their discretionary outgoings like birthday parties.

“We’ve got our own children so we appreciate how expensive a day out can be,” Boston said.

“Everything’s going up… we’ve got a limit on what we can charge so the profit margin is getting smaller and smaller.”

Kennedy added that where families used to use the centre as an all-inclusive venue, there are more visitors paying for activities but not food – “which is understandable … money’s a lot tighter”.

Boston said the centre has endured the Covid pandemic, a fire, a flood and a theft, but “this seems [to be] the most difficult period we’ve had” in their 13 years in business.

Chancellor Rachel Reeves told the BBC that she would set out more support for families and businesses affected by the war next week.

“The economy is growing strongly, and because of that growth we’ll be able to do more to invest in our public services and to support families and businesses with the cost of living,” she said.

But in a reference to the current speculation about the prime minister’s position, Reeves said: “We shouldn’t put [economic stability] at risk by 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.”

Shadow chancellor Mel Stride said Labour said the “chaos surrounding the Labour leadership is destabilising Britain’s economy”.

“This week, borrowing costs hit their highest level in 30 years as Labour leadership contenders competed to promise even more spending, borrowing and fantasy economics.”

Liberal Democrat Treasury spokesperson Daisy Cooper MP said the quarterly figure was “already in the rear-view mirror” because of the war.

“Instead of tackling the cost of living, the government is consumed by infighting.”

Ruth Gregory, deputy chief UK economist at Capital Economics, said the latest growth figures would “be the high point for the year” given the effects of the war in Iran.

“We would be very surprised if growth doesn’t weaken from May as the temporary boost from stockpiling unwinds and the squeeze on households’ real incomes from higher energy prices intensifies.

“In our adverse scenario, the economy suffers a mild recession. So the economy will probably give whoever is prime minister a rough ride.”

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