United Kingdom economic output rose faster than expected in February, but the upbeat data has already been overshadowed by a sharp deterioration in the outlook following the recent geopolitical conflict.
February data show stronger momentum
Gross domestic product (GDP) expanded by 0.5% month-on-month in February, according to data assessed by TD Securities, far above the 0.1% rise projected. On current trends, growth in the first quarter appears to be running ahead of the Bank of England’s (BoE) forecast of 0.2%.
Service industries led the improvement, with output up 0.5% on the month versus expectations of 0.2%. Twelve of fourteen service sectors grew, driven mainly by wholesale and retail trade and by professional and administrative services.
Production and construction also contributed to the expansion, suggesting that activity was strengthening across several parts of the economy. On a three‑month‑on‑three‑month basis, GDP rose 0.5%, marking an acceleration from the weak pattern seen late in 2025.
Strategists at TD Securities said the figures point to broader economic momentum but reflect conditions before the recent conflict. As a result, they see little implication for the BoE’s policy decision at its April meeting.
Data overtaken by geopolitical shock
The economic picture captured in February was quickly outdated as geopolitical tensions escalated at the end of the month. Market conditions shifted markedly from February 28th onward, limiting the usefulness of the earlier strength as a guide to future performance.
The conflict has driven a rapid reassessment of inflation and growth, with external pressures now dominating the outlook.
Inflation forecasts revised sharply higher
The main consequence of the shock has been a major revision in inflation expectations. BoE preliminary estimates in March now see Consumer Price Index (CPI) inflation between 3.0% and 3.5% through the second and third quarters of 2026. Previously, inflation had been expected to fall back to the 2% target.
This upward shift is largely attributed to higher energy prices linked to the conflict. Survey data point in the same direction: the March YouGov/Citi poll showed households’ year-ahead inflation expectations jumping to 5.4%.
Rate cut expectations evaporate
Higher inflation has reshaped expectations for monetary policy. Hopes for interest rate cuts that were widespread before the turmoil have largely disappeared.
Financial markets, which had priced in the possibility of BoE rate reductions starting as early as March, now imply that the central bank will keep its benchmark rate at 3.75% for the rest of 2026. A majority of economists polled by Reuters back that view. The next policy meeting on April 30th is widely expected to result in rates being held steady.
Growth outlook deteriorates despite strong february
Despite the robust February numbers, the broader growth outlook has worsened. Corporate sentiment has slumped in the wake of the conflict and rising uncertainty.
A survey of corporate financial officers conducted between March 16 and 30 showed confidence plunging to -57%, reflecting the immediate response to the new global instability. Deloitte reported that a net 79% of chief financial officers now expect to cut hiring, while 68% have made cost control a strong priority, signalling a shift towards more defensive strategies.
Forecasts have followed that mood. Oxford Economics has cut its 2026 GDP growth projection for the UK from 0.9% to 0.4%, citing weaker demand and tighter financial conditions.
Focus shifts for market participants
For traders operating in fast-moving markets that are highly sensitive to macroeconomic changes, the pre-conflict data are increasingly seen as a distraction. Strategies built on the assumption of easing inflation and looser monetary policy now require urgent revision.
Attention is turning to the twin pressures of persistent inflation and elevated geopolitical risk. With borrowing costs expected to stay high while growth forecasts are being trimmed, trading decisions are likely to hinge on how different assets respond to this combination of weaker activity and stubborn price pressures in the months ahead.
Amid inflation and growth uncertainty, learn how crypto markets respond to macro shocks in our latest crypto impact analysis.
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