The United Kingdom's economy expanded 0.5% in February 2026, far exceeding the 0.1% growth economists polled by Reuters had forecast, the Office for National Statistics reported Thursday. The upside surprise — the largest monthly GDP beat since September 2021 — was driven by a powerful rebound in the services sector, which accounts for approximately 80% of UK economic output, while manufacturing contracted for the fourth consecutive month reflecting supply chain disruptions tied to the Middle East conflict.
Services output grew 0.7% month-on-month in February, with professional and financial services delivering the strongest contribution. London's financial services sector benefited from elevated trading volumes in commodities and foreign exchange markets, while legal and consulting firms reported strong demand linked to the wave of corporate restructurings and crisis management engagements generated by geopolitical uncertainty.
A Diverging Two-Speed Economy
The GDP data revealed a stark bifurcation within the UK economy. Services sectors closely linked to the digital and knowledge economy are thriving, while goods-producing industries face severe headwinds. Manufacturing output fell 1.2% in February, with chemicals, automotive parts, and aerospace components most affected by supply chain disruptions and elevated energy costs. Construction also contracted 0.4% as higher material costs squeezed project margins.
The data means the UK economy grew at an annualized pace above 4% in February, a rate that puts the UK firmly among the strongest performers in the G7 year-to-date. Economists caution, however, that February's strength was partly driven by businesses rebuilding depleted inventories, a process that may not sustain into Q2.
Bank of England Recalibrates Rate Outlook
The stronger-than-expected GDP data complicated the Bank of England's already delicate policy calculus, pushing UK gilt yields higher as markets trimmed rate cut expectations for the near term. Prior to the GDP release, markets were pricing two 25-basis-point cuts by year-end; the data has repriced this to approximately 1.5 cuts.
Sterling rallied 0.6% against the U.S. dollar following the release, reaching $1.2870. UK equity markets also responded positively, with the FTSE 100 gaining 0.9% and the domestically-focused FTSE 250 rising 1.4%, its largest single-day move since January. The pound's gain boosted UK-listed companies with significant dollar earnings as well, adding a currency translation tailwind.