UK economy grew 0.5% in February, beating economists' expectations by a long shot

The U.K. economy grew by 0.5% in February, according to preliminary figures from the Office for National Statistics published Thursday.

Economists polled by Reuters expected U.K. gross domestic product (GDP) to have expanded by 0.1% month-on-month.

Services and production both grew by 0.5%, and construction grew by 1% in February.

The rebound came after the economy grew by 0.1% in January (the first estimate from the ONS suggested the economy had flatlined).

While the data for February was far better than expected, analysts said it will very much be viewed as backward-looking data given subsequent events in the Middle East, with the U.S. and Iran launching military operations against Iran on Feb. 28.

The International Monetary Fund warned earlier this week that the U.K. could see the biggest hit to growth from the Iran war of any major economy.

The IMF is now forecasting U.K. growth of just 0.8% in 2026, down from a previous forecast of 1.3%. that the IMF made in January

"Looking ahead, we expect growth to temper," Sanjay Raja, chief U.K. economist at Deutsche Bank, said in emailed analysis.

"Indeed, higher uncertainty would dampen spending and investment. Tighter financial conditions won't help either. With sentiment weakening, we expect output to also take a hit," he added.

As a net importer of energy, the U.K. is particularly vulnerable to global energy price shocks like the one being caused by conflict in the Middle East, which has put a stranglehold on oil and gas exports from the region.

Before the war began in late February, the Bank of England was expected to cut interest rates as inflation cooled to its 2% target. The war has put paid to those expectations, however.

Economists now expect U.K inflation to accelerate in March to 3.3%, from 3% in February, forcing the bank to hike interest rates at least once this year. The latest inflation data is due on April 22.

Patrick O'Donnell, chief investment strategist at Omnis Investments, noted that the February GDP data will likely have minimal impact on the Bank of England policymakers' thinking at their next meeting at the end of the month.

"With uncertainty high and multiple crosscurrents, we expect the BoE to sit on their hands. Looking beyond April, the market is split between 25 basis points and 50 basis points of hikes by the end of the year. With the BOE still viewing bank rate as being still in restrictive territory, currently, we think it is more likely that they remain on hold."