The UK economy has returned to growth with a stronger‑than‑expected 0.6% rise in gross domestic product (GDP) in the three months to March, according to official figures, bringing the country out of recession and easing fears of a prolonged downturn.

Data from the Office for National Statistics (ONS) shows output rebounding after two consecutive quarters of contraction in the second half of last year, the technical definition of a recession. Economists had expected more modest growth, but a broad‑based improvement in services and consumer‑facing industries helped to deliver the fastest quarterly expansion since before the cost‑of‑living crisis took hold.

Services lead the rebound

The ONS said growth was "led by the dominant services sector", which accounts for around 80% of UK economic output. Monthly figures indicate that GDP rose by 0.3% in March alone, beating consensus expectations and suggesting momentum was building towards the end of the quarter.

Professional and business services, IT and digital activities, and consumer‑oriented services such as retail, hospitality and leisure all contributed to the upswing. Early indicators point to improving confidence among both households and firms as energy prices stabilised compared with the extreme volatility seen in 2022 and 2023.

The latest quarterly data also captures the first full month of economic activity since the outbreak of the war involving Iran, which has injected fresh uncertainty into global energy markets. Despite this, domestic demand proved more resilient than anticipated, supported by easing — though still elevated — inflation and slightly stronger real wage growth.

A brighter outlook, but with new risks

The return to growth marks a notable shift in the UK’s economic narrative, which over the past year has been dominated by high inflation, weak productivity and concerns that Britain was lagging behind other advanced economies. The figures are likely to be seized upon by ministers as evidence that the economy is turning a corner.

However, the backdrop remains challenging. The Bank of England’s latest decision left Bank Rate on hold at 3.75%, while inflation has ticked up to 3.3% and is expected to rise further this year as the war in the Middle East drives energy costs higher. That complicates the outlook for monetary policy and raises questions about how durable the recovery will be if price pressures re‑intensify.

Higher oil and gas prices risk eroding household purchasing power just as consumers start to feel some relief from the worst of the cost‑of‑living squeeze. Businesses, particularly in energy‑intensive sectors, face renewed margin pressure from fuel and input costs, which could dampen investment and hiring later in the year.

Implications for the Bank of England

The stronger‑than‑expected GDP figures will feed directly into the Bank of England’s deliberations in the coming months. With output picking up and inflation running above its 2% target — and forecast to rise further — the case for imminent interest rate cuts looks weaker than it did earlier in the year.

Policymakers must now weigh the risk of choking off a fragile recovery against the danger of allowing price pressures to become entrenched again. The Bank has signalled that, whatever happens to energy prices, it is committed to returning inflation to target, suggesting it will err on the side of caution before loosening policy.

• A stronger growth profile reduces immediate pressure for rate cuts, especially if wage growth remains firm.
• At the same time, tighter policy for too long could limit investment and productivity, constraining future growth.
• Financial markets will be closely watching upcoming inflation releases and labour market data for clues about the timing of any shift in stance.

Business and consumer response

The rebound in services points to a tentative revival in consumer confidence, helped by marginally lower inflation, a recovering housing market in some regions and early signs of stabilisation in real incomes. Retailers and hospitality operators report a modest pickup in discretionary spending, although volumes remain below pre‑pandemic trends in many categories.

For businesses, the combination of higher growth and renewed geopolitical risk presents a mixed picture. On the one hand, firmer demand at home should support revenues, particularly for domestically focused sectors such as construction, logistics, and business services. On the other, uncertainty over the duration and intensity of the conflict in the Middle East makes long‑term planning more difficult and may cause some firms to delay capital spending.

The government is likely to argue that the data vindicates its emphasis on stability and supply‑side reforms, pointing to recent measures to encourage investment, support high‑growth sectors such as technology and life sciences, and streamline planning rules. Critics counter that growth remains modest by historical standards and that structural issues — including low productivity, regional disparities and pressures on public services — continue to weigh on the UK’s medium‑term prospects.

From recession to recovery?

Economists are divided on how strong and durable the recovery will prove to be. Some forecast that the UK will sustain moderate growth through the rest of the year, supported by easing real‑income pressures and a possible loosening of monetary policy if inflation behaves as expected. Others warn that the boost could fade quickly if energy prices rise further, global demand softens or domestic political uncertainty undermines confidence.

What is clear is that the UK has moved out of recession more quickly than many had feared. The challenge now will be to convert a short‑term rebound into a sustained, broad‑based expansion that lifts living standards and encourages businesses to invest. With inflation still above target and geopolitical risks high, the margin for policy error remains narrow.

For households and companies alike, the latest GDP numbers offer some welcome relief after a difficult period — but not yet a guarantee that the UK economy is firmly back on track.