It must be bittersweet being Rachel Reeves. Figures just released by the Office for National Statistics (ONS) show the economy grew by 0.5 per cent in February. That is significantly better than economists had expected and, coupled with the fact that January growth has been revised up, it marks probably the first piece of seriously good economic news for the Chancellor since she entered No. 11 Downing Street.
Pretty much everything other than manufacturing saw improved performance and demand at the start of the year. Car sales, publishing and real estate helped drive services up by 0.5 per cent. Production grew too and even construction, which has been shrinking, saw one per cent month-on-month growth.
The trouble is, of course, this is data from a different world. Having spent a year adjusting to the increased cost of doing business – thanks to higher minimum wages and National Insurance contributions – firms seemed to be investing heavily in Britain again. That improved sentiment was so missed by forecasters that it likely means the bump at the start of the year would have been enough to lift annual growth projections and increase Reeves’s headroom too.
But that world is no more. The next GDP figures we get will take into account the conflict in the Middle East and what it has done to energy prices, which, as the International Monetary Fund pointed out this week, we are more exposed to than pretty much anyone else. Increased prices will mean businesses return to caution and households will tighten their budgets too.
Even if things had not kicked off in the Middle East, though, there is reason to be cautious about today’s growth figures. As James Smith from the bank ING points out, since 2022 we tend to see much stronger growth in the first quarter of the year that then peters out over the next few months. It is a seasonality data problem that has baffled the ONS. Economists reckon it is because of the higher inflation we have seen since 2022 leading to price rises in the new year, which the ONS is not properly adjusting for.
Nevertheless, there does seem to have been genuine improvement in the British economy at the start of 2026. It is a shame to think what perhaps could have been.
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