What's happening to the UK economy and how does it affect you?

Politicians often talk about the importance of economic growth.

It matters because it affects things like pay increases for workers and the amount of tax the government raises to pay for services.

However, many analysts are concerned that the UK economy is not growing fast enough, and are worried about the negative impact of the US-Israeli war with Iran.

What is GDP and why does it matter?

GDP stands for gross domestic product, which is a measure of all the economic activity of companies, governments, and people in a country.

In the UK, the Office for National Statistics (ONS) publishes new GDP figures every month. However, these can vary quite a lot and the quarterly figures - covering three months at a time - are considered more significant.

Most economists, politicians, and businesses like to see GDP rising steadily.

That's because it usually means people are spending more, extra jobs are created, more tax is paid, and workers get better pay rises.

When GDP is falling, it means the economy is shrinking.

This can be bad news for businesses and workers as it can lead to pay freezes and job losses.

What is happening to the UK economy?

The latest official figures show that the UK economy grew faster than expected in February.

But this refers to a period before the outbreak of the Iran war, which is having a huge impact on the global economy.

When the Labour government took power in July 2024, it said growth was its top priority.

Across 2025 as a whole, UK GDP was estimated to have increased by 1.4%, up from 1.1% in 2024.

In March, the Office for Budget Responsibility (OBR) - the government's official forecaster - cut its prediction for how much the UK's economy would grow across 2026 from 1.4% to to 1.1%.

However, this forecast was also made before the start of the war began.

In April, the International Monetary Fund (IMF) said it expected the conflict to hit the UK the hardest of the world's advanced economies. It cut its estimate for UK growth in 2026 from 1.3% to to 0.8%.

How does GDP affect tax and public services?

If GDP is going up steadily, people pay more in tax because they're earning and spending more.

This means more money for the government, which it can choose to spend on public services, such as schools, police and hospitals.

When the economy shrinks and a country goes into recession, these things can go into reverse.

Governments tend to get less money in tax, which means they may decide to freeze or cut public spending, or put taxes up.

In 2020, the Covid pandemic caused the most severe UK recession for more than 300 years, which forced the government to borrow hundreds of billions of pounds to support the economy.

GDP can be measured in three ways:

Output: The total value of goods and services produced by all sectors of the economy - agriculture, manufacturing, energy, construction, the service sector and government.

Expenditure: The value of goods and services bought by households and by government, investment in machinery and buildings. This also includes the value of exports, minus imports.

Income: The value of the income generated, mostly in terms of profits and wages.

In the UK, the ONS publishes one single measure of GDP, which is calculated using all three measurements.

But early estimates mainly use the output measure, using data collected from thousands of companies.

Why does the GDP figure sometimes change?

The UK produces one of the quickest estimates of GDP of the major economies, about 40 days after the quarter in question.

At that stage, only about 60% of the data is available, so the figure is revised as more information comes in.

What are the limitations of the GDP figure?

The hidden economy: Unpaid work such as caring for children or elderly relatives isn't captured.

Inequality: Rising GDP could result from the richest getting richer, rather than everyone becoming better off, and some people could be worse off.

Living standards: If the population is also growing, increased GDP can still mean less money per person, which can reduce people's living standards. This is why the GDP per capita measure is important.

Alternative measures have been developed which try to capture this.

Since 2010, the ONS has also measured well-being alongside economic growth. This assesses health, relationships, education and skills, as well as people's personal finances and the environment.

But despite its limitations, GDP is still the most widely used measure for most government decisions and international comparisons.