DAVY VIEW

UK gross domestic product (GDP) was far stronger than expected in February. While some elements of the results look noisy, especially construction which jumped 1% on the month despite heavy rainfall and downbeat private sector commentary, the strength of services output was quite broadly based. While household spending was supported by real wage growth last year, a more likely avenue for this year could be a reduced savings rate. Nonetheless, a slowdown in output in March and April looks likely due to war in the Middle East. With the UK economy growing below its potential, we see limited need for the Bank of England to increase interest rates this year provided the trend in underlying disinflation remains intact as 2026 progresses.