San Francisco Frontiers - UK economy resilient as Mideast war, political risks loom

Gross domestic product rose 0.6 percent in the January-March period, up from a revised expansion of 0.2 percent in the final three months of last year, the Office for National Statistics said.

The ONS added that GDP grew 0.3 percent in March alone, beating analysts' expectations as the economy held up at the start of the Middle East war.

"Today's figures show the government has the right economic plan," finance minister Rachel Reeves said after the data release. "Our economy is in a stronger position as we deal with the costs of the war in Iran."

"Now is not the time to put our economic stability at risk," she said, as Starmer fights to remain prime minister after disastrous local and regional polls for his Labour Party last week.

Surging energy prices stemming from the Middle East war, which began with US-Israeli strikes on Iran on February 28, have reignited inflationary pressures and threaten to derail growth.

Thursday's data showed "the economy performed remarkably well in the early stages of the energy price shock", said Ruth Gregory, deputy chief UK economist at Capital Economics.

But she warned that growth could weaken "as the temporary boost from stockpiling unwinds and the squeeze on households' real incomes from higher energy prices intensifies".

- 'Too little, too late' -

The figures come as Starmer battles to face down a revolt within Labour following heavy losses to the hard-right Reform UK and the left-wing Greens in last week's elections.

The results capped a difficult few months for the party, which has struggled to revive Britain's economy since winning a general election in July 2024, having raised taxes in its two annual budgets.

There were signs of economic progress earlier in the year, with inflation easing towards the Bank of England's two-percent target and unemployment unexpectedly falling in February.

But the Middle East war has rekindled concerns, with the Bank of England signalling that interest rates may need to rise if the war pushes up inflation -- even at the expense of economic growth.

In recent days, UK government bond rates have reached the highest levels in decades, with investors selling on concerns the country's political uncertainty will compound inflationary presssures.

Starmer has reacted by vowing to move "with greater urgency" to make Britain "stronger and fairer".

It came as the government outlined proposed legislation for the next 12 months, which includes deepening Britain's relationship with the European Union and renationalising British Steel.

But questions remain over whether Starmer will be around to implement the changes as he faces calls from within his own camp to resign.

Critics say the prime minister has swerved from one policy misstep to another during his 22 months at the helm.

"The more upbeat UK performance is also likely to be too little, too late for... Starmer," Susannah Streeter, chief investment strategist at Wealth Club, said in response to Thursday's GDP data.

P.Thomas--SFF