Emeritus Professor Joe Nellis is economic adviser at MHA, the accountancy and advisory firm.
- Largest month-on-month growth since December 2024, but long-term prospects thrown off track by conflict in Middle East.
- Lower growth leads to reduced tax revenues, threatening public finances.
- Government faces trade-off between protecting households and maintaining fiscal discipline.
The UK economy grew by 0.5% in February, improving on the now‑revised 0.1% expansion recorded in January. Beating expectations, this marked the strongest month‑on‑month growth since December 2024. That appears to be progress — but the rules of the game have shifted dramatically since.
The continued crisis in the Middle East has led the IMF to scale back UK growth expectations for 2026 sharply, with output now projected to expand by just 0.8% this year. The downgrade reflects a combination of higher energy costs, a more cautious path for interest rate reductions, and the lingering effects of geopolitical tension feeding through into prices and confidence.
As a net energy importer, the UK feels global price spikes quickly and acutely. That feeds directly into household bills and business overheads, acting as a drag on spending and investment. At a time when momentum was already weak, this shock compounds existing fragilities rather than creating new ones.
For the Government, the implications are significant. Slower growth means weaker tax receipts, while spending demands — from public services to debt interest — remain high. That leaves little room for policy flexibility.
Pressure on Government expenditure will continue to intensify. Public services remain stretched, debt interest costs are still uncomfortably high, and demographic demands — particularly in healthcare and pensions — are rising relentlessly. Add to that the growing political and strategic pressure to increase defence spending, and the fiscal headroom shrinks even further.
The Government is left with an uncomfortable trade-off: increase spending to protect households struggling with increased energy costs or maintain fiscal discipline. They could do both, leaving them with more unpopular options: raising taxes or cutting spending elsewhere.
There is some prospect of improvement next year if energy prices stabilise and global conditions settle. But that recovery is far from guaranteed. For now, the UK faces a familiar problem: low growth, persistent inflation, and limited policy room. How effectively it navigates this period will shape its economic trajectory well beyond the current shock.
