- Better start. UK real GDP grew 0.6% in Q1 2026, up from a revised 0.2% in Q4 2025, according to the Office for National Statistics — the strongest quarterly reading in a year, led by a 0.8% expansion in services and a 2.0% jump in wholesale and retail trade.
- Revised forecasts. Since the ONS published its data on May 14, the OECD has revised its full-year 2026 UK growth forecast down to 0.7% from 1.2%, while raising its inflation projection to 4.0% from 2.5% — a direct consequence of oil prices remaining elevated above $100 per barrel due to the Iran conflict.
- Policy bind. The Bank of England, which held its base rate at 3.75% in April with an 8-1 vote, faces rising inflation driven by an external supply shock that tighter domestic monetary policy cannot directly address.
The ONS first quarterly estimate for January to March 2026, released on May 14, confirmed the UK economy continued expanding even as global uncertainty intensified. Services — the dominant sector — grew 0.8%, with consumer-facing services matching that pace and wholesale and retail trade surging 2.0%. Construction rose 0.4% and manufacturing added 0.8%. Mining and quarrying contracted 4.5%, but the overall picture was one of resilient domestic demand absorbing higher energy costs. Real GDP per head grew 0.6% in the quarter, reversing a prolonged period in which output gains were insufficient to offset population growth.
What the OECD is warning
The Organisation for Economic Co-operation and Development’s revised projections, published after the ONS data, reflect a deteriorating second-half outlook rather than a reassessment of Q1. The OECD’s concern is that oil prices persistently above $100 per barrel — Brent crude traded above $107 throughout May — will feed through into consumer prices at a rate the Q1 data does not yet capture. The UK imports roughly half its energy needs, making it more exposed than most large European economies to a sustained oil shock.
The scale of the revision is significant: the OECD cut the growth forecast by nearly half while raising the inflation call by 60%, signalling a genuine stagflation scenario. Rate cuts to support growth would accelerate inflation; rate hikes to control inflation would deepen what the OECD already expects to be a sharp slowdown. This is the same bind now facing the Federal Reserve, where US consumer prices rose 3.8% in April — their highest since May 2023 — driven by the same Iran-linked energy shock.
The Bank of England’s next move
The Monetary Policy Committee voted 8-1 to hold Bank Rate at 3.75% at its April meeting, with the lone dissenter favouring a cut rather than a hold. Governor Andrew Bailey has said the MPC is “watching carefully” the pass-through of energy costs into core inflation, which rose 2.8% year-on-year in the March data. The next rate decision is scheduled for June 18.
Given the OECD’s revised projections and the persistence of the oil shock, a cut before June appears effectively ruled out. The more pressing question is whether a rate rise comes back onto the table if the May CPI print — due in June — follows the trajectory of the US April reading. The GDP deflator, a broad measure of domestic price pressure, already rose 1.0% in Q1 alone and 3.5% year-on-year, indicating that inflation is not solely an imported energy phenomenon but is beginning to spread into domestically produced goods and services.
The outlook
The Q1 GDP recovery is a genuine bright spot: household consumption grew 0.6% and government consumption expanded 0.4%, suggesting that the fiscal measures introduced in the Autumn Statement are supporting demand at the margin. But the OECD’s caution about the second half is well-founded. If Iranian oil supply disruptions persist through Q2 and Q3, the energy cost burden on UK households and businesses will compound, and the OECD’s full-year growth forecast of 0.7% — barely above stagnation — may prove optimistic rather than conservative.