GDP data reflects a strong start to the year for the British economy. However, the Middle East conflict is beginning to take a toll on business sentiment.
The UK economy expanded by 0.6% during the first quarter of 2026, following a sluggish second half of 2025. Growth was broad-based across sectors, with services, manufacturing, and construction all recording expansion during the quarter.
The data points to a solid performance in both manufacturing and services, each of which grew by 0.8% in Q1 2026. Within the services sector, there was significant growth in both consumer-facing and non-consumer-facing industries, which expanded by 0.7% and 0.8% respectively. Construction, which recorded a particularly weak end to 2025, experienced a recovery in output at the start of the year, growing by 0.4%.
Business investment also rebounded positively, rising by 0.7% after having fallen by nearly 3% in the previous quarter.
The increase in economic activity was consistent with improving business survey results throughout the quarter, as private-sector confidence strengthened before the outbreak of the Middle East conflict. Prior to the conflict, there were several reasons for businesses to feel more optimistic about the economic outlook. Inflation was declining, real wages were expected to rise, borrowing costs had fallen and were anticipated to decrease further, and some sources of international uncertainty had eased. U.S. tariff concerns had stabilised somewhat, while businesses were no longer anticipating a major fiscal event during the spring.
There has been considerable discussion regarding the strength of first-quarter GDP figures over the past few years. Some of this may be attributed to a rebound in activity following cautious spending and investment decisions around autumn budget announcements. The Office for National Statistics (ONS) has published a useful blog explaining its approach to seasonal adjustment. Additionally, the move to a single annual budget event may be contributing to shifts in economic activity during the early months of the year.
Headline inflation fell to 2.8% in April 2026, its lowest level since March 2025. The decline was largely expected, as a lower household energy price cap came into effect during the month. This change alone reduced headline Consumer Price Index (CPI) inflation by nearly 0.5 percentage points. It also helps explain the differing inflation trajectory in the UK compared with its European counterparts, where consumer prices have accelerated since the onset of the Middle East conflict.
Lower utility costs also contributed to a decline in services inflation, which fell to 3.2%—its lowest rate in four years, since the beginning of 2022, before Russia’s invasion of Ukraine. Another positive development was the decline in core inflation, which excludes food and energy prices, to 2.5%. This marked the lowest level in nearly five years, since July 2021.
Possibly indicating future inflationary pressures, transport services made the largest contribution to CPI growth for the first time since late 2022. This was driven by rising fuel prices following increases that began in March 2026. Although crude oil prices eased somewhat towards the end of May 2026, transport costs are likely to contribute to higher inflation in the months ahead.
More significantly, a new energy price cap has been announced for July 2026, with average household bills expected to rise by approximately 13%. This development may keep inflation well above the Bank of England’s target for the remainder of the year.
Despite strong economic growth in the first quarter, activity within the services sector has weakened since the outbreak of the Middle East conflict. The S&P Global Purchasing Managers’ Index (PMI) is estimated to have fallen sharply in May 2026, returning to contraction territory for the first time in more than a year, since April 2025.
Demand from both businesses and consumers has weakened amid concerns over the impact of the Iran conflict and rising inflation. Some respondents also reported weaker demand for international travel. At the same time, cost pressures have increased among service-sector businesses, adding further challenges to the economic outlook.
