Boost for Reeves as GDP shows 0.6% growth despite Iran war crisis

The UK economy grew by 0.6 per cent this year according to latest gross domestic product (GDP) figures, following days of economic turbulence as Keir Starmer’s leadership crisis continues.

In recent days the pound has dropped and investors have been selling government bonds all as ministers resign and MPs call for Sir Keir to step down from his role as prime minister.

Most economists expected official figures to show the economy slamming into reverse in March, with a 0.2 per cent contraction following 0.5 per cent growth in February.

But the outturn for the quarter as a whole was boosted by the performance in the first two months of the year, with a 0.6 per cent growth between January and March.

EY’s economic outlook implies UK consumer spending growth will grind almost to a halt.

It suggests growth could plunge to just 0.3 per cent this year if the Iran war escalates and the crucial Strait of Hormuz shipping route remains closed for the rest of the year.

Inflation will peak at 4 per cent by the end of 2026 under its central forecast, which it believes will see interest rates held at 3.75 per cent for the rest of the year, while unemployment will hit 5.8 per cent as weaker growth impacts hiring.

Peter Arnold, EY’s UK chief economist, said: “Despite a relatively strong start to 2026, the conflict in the Middle East means the UK economy is once again being shaped by external shocks and on track for another year of subdued growth.

“We expect the first quarter of this year to show GDP on a fairly promising trajectory, before flatlining in the second quarter and gradually recovering into 2027 as the global markets adjust.

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“Energy supply constraints will push inflation higher and delay interest rate cuts, increasing the cost of borrowing for businesses and prompting some companies to reassess spending decisions.”