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Britain's gross domestic product grew by 0.3% in March, the Office for National Statistics reported, confounding market expectations of a 0.1% decline. The figure marks the first monthly expansion since January and follows a 0.1% contraction in February.
Services output rose 0.4% month-on-month, driven by strength in retail and hospitality, while industrial production fell 0.1%. Manufacturing edged down 0.3%, partly due to supply chain disruptions related to the Iran situation. Construction output increased 0.2%.
Analysts had widely anticipated a negative reading, with many citing heightened uncertainty from the Iran conflict, which began in late February. However, consumer spending held up better than expected, supported by a strong labor market and easing inflation.
"The economy has shown remarkable resilience in the face of external shocks," said Ruth Gregory, deputy chief UK economist at Capital Economics. "But the risk of a further slowdown remains elevated given the geopolitical backdrop."
The Bank of England is set to release its next monetary policy decision in June. Markets are currently pricing in a roughly 40% chance of a rate cut at that meeting, though today's data may temper those expectations.
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Key Highlights
- Surprise upside: GDP expanded 0.3% in March versus consensus forecasts of a 0.1% contraction, the first positive reading in three months.
- Sector divergence: Services grew 0.4%, while industrial production slipped 0.1% and manufacturing contracted 0.3%, reflecting Iran-related supply chain strains.
- Consumer resilience: Retail and hospitality sectors drove the services uptick, aided by steady employment and easing price pressures.
- Policy implications: The stronger-than-expected data could reduce the urgency for the Bank of England to cut interest rates in June, though geopolitical risks persist.
- Geopolitical overlay: The Iran conflict continues to affect trade routes and energy prices, posing downside risks to future growth despite the March rebound.
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Expert Insights
The March growth figures suggest the UK economy may be more insulated from external shocks than previously assumed. However, analysts caution against extrapolating a sustained recovery from one month's data.
"One positive number does not make a trend," noted economists at Pantheon Macroeconomics. "The full impact of the Iran conflict on trade and investment is still unfolding, and we could see weaker prints in the months ahead."
The Bank of England's Monetary Policy Committee is expected to weigh the mixed signals carefully. While the growth surprise may argue against an immediate rate cut, the underlying weakness in manufacturing and ongoing geopolitical uncertainty would likely keep the door open to loosening later this year.
Investors should monitor upcoming indicators for signs that the geopolitical drag is intensifying. Key data releases to watch include the April PMI surveys and the next inflation report, both due later this month. The UK's trade balance with Iran-affected regions will also be a critical barometer of economic exposure.
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