The week ahead 18 May 2026 - UK GDP expands despite the war
What to watch out for in the UK economy and property market this week.
Many commentators believed the UK GDP figures would show the economy contracted in March, the first month of the Iran war, but data released last week proved the opposite was true. On a month-on-month comparison, GDP expanded by 0.3%, compared to a consensus forecast of -0.2%. This was down on the 0.4% recorded for February, but nevertheless shows the resilience of the economy in the face of a major conflict. For Q1, the GDP growth rate was 0.6%, up from 0.2% in the previous quarter. Of the G7 countries that have so far reported Q1 GDP figures, Britain has seen the strongest growth.
The figures suggest the UK has moved into the war and the current Westminster political upheaval on a relatively strong footing. Slower GDP growth looks likely for Q2 and Q3 of this year. Nevertheless, a robust March for the economy raises the possibility that the slowdown ahead might not be as bad as was previously assumed.
Reflecting the above-mentioned political uncertainty in Downing Street, the 10-year gilt yield was volatile last week, reaching 5.16% on Friday afternoon, up from 4.76% a month ago. Given it looks like the Westminster controversy is set to last weeks, perhaps months, further bond market volatility is probable in the short-term. However, the increase in gilt yields is reducing the need for the Bank of England to increase the base rate in response to higher inflation.
Across the Atlantic, US inflation increased from 3.3% in March to 3.8% in April, which was higher than Wall Street’s forecast of 3.7%. Nor was the increase entirely attributable to higher petrol prices, as core inflation (which excludes food and fuel) rose from 2.6% in March to 2.8% in April. There is now talk of suspending Federal taxes on petrol to ease the financial pressure on households.
This week sees the release of data on the UK labour market and business activity.
The jobs market has had a difficult year, with more firms choosing to use artificial intelligence (AI) as an alternative to recruiting. While the unemployment rate did fall in the February data, that was due to more people being classified as inactive rather than unemployed. We believe that February saw a temporary dip in the unemployment rate, and we are predicting a small increase to be reported for March.
Turning to the PMI business activity index, this is a survey of firms whose responses are converted into a score, which, if it exceeds 50.0, suggests the commercial side of the economy is expanding. The April survey was stronger than expected, but we suspect fears over inflation encouraged some buyers to bring forward orders into April to avoid future price rises. Consequently, we believe the May reading will be lower, although not to the extent that it drops below 50.0.
This week's figures
Tuesday 19 May
UK Unemployment Rate, March
4.9% previous
5.0% forecast
The fall in the unemployment rate recorded in February was driven by changes in the inactivity rate, not higher recruitment. We believe greater use of AI by firms is weighing on the labour market, so are predicting a small rise in the jobless rate for March.
Thursday 14 May
UK 'Flash' Composite PMI, May
52.6 previous
51.8 forecast
The PMI saw an unexpected increase in April, possibly due to fear of inflation persuading customers to bring forward orders. Consequently, we are forecasting a decline in May, but to a figure still above the pivotal 50.0 mark.
