News of the week summary - 17/05/2026

UK economy grew faster than expected before the Iran shock hit

The Office for National Statistics reported on Thursday that UK GDP grew 0.6 percent in the first quarter of 2026, compared with the preceding three months. That was double the 0.3 percent forecast by the Office for Budget Responsibility and comfortably above the Bank of England's own projection of 0.5 percent. Services led the expansion, growing 0.8 percent with eleven of fourteen subsectors contributing positively. Construction returned to growth at 0.4 percent, and production edged up 0.2 percent. On a per-head basis, real GDP also rose 0.6 percent, putting the economy 6 percent above its pre-pandemic level.

The number that matters most, though, is the one not visible in these figures: the conflict in the Middle East began on 28 February, meaning the Q1 data captures only the very first days of the shock. The quarter was essentially over before the energy price surge, the shipping disruptions, and the collapse in business confidence had time to feed through to output. Economists were quick to note this limitation, with several describing the result as representing "old news" that may give an overly optimistic impression of where the economy currently stands. Business investment rose 0.7 percent in the quarter but remains 1.8 percent below a year earlier, a signal that corporate caution was already present even before the conflict. The second quarter will offer the first real read on how the Iranian energy shock is affecting the British economy.

Japan spends record sums to defend the yen

Away from Europe, Japan provided a reminder of how the energy shock was transmitting through currency markets. The Japanese Ministry of Finance confirmed during the week that it had spent approximately 11.7 trillion yen, equivalent to around $73.5 billion, on foreign exchange intervention operations between late April and mid-May, the largest such campaign in history by a significant margin. The operations were aimed at slowing the yen's decline against the dollar, which had pushed the exchange rate back above 160 yen per dollar, a level widely seen as triggering official concern.

Japan's situation illustrates the structural difficulty facing many energy-importing countries. The yen's weakness compounds the energy shock: because oil is priced in dollars, a weaker yen raises the effective cost of every barrel Japan imports, pushing up fuel prices domestically and adding to inflationary pressure that the Bank of Japan would normally address by raising rates. But raising rates substantially risks choking off an economy that has only recently returned to modest growth after years of deflation. The Bank of Japan had been signalling that a rate increase was likely at its June meeting, a move that would be its first since December 2025. For now, intervention operations were doing the work that higher rates had not yet been deployed to do, though analysts were sceptical that currency management alone could reverse the yen's underlying direction while the interest rate gap with the United States remained as wide as 300 basis points.

UK job vacancies hit a five-year low as the labour market cools

The day before the GDP release, the ONS published its monthly labour market data, and the picture it painted was considerably less encouraging. The unemployment rate rose to 5.0 percent in the three months to March 2026, up from 4.5 percent a year earlier. Job vacancies fell to 705,000 in February to April, their lowest level since early 2021 and down 3.9 percent from the previous quarter. Payrolled employment fell by 94,000 over the year to March. Real wage growth had effectively stalled: regular earnings grew 3.4 percent in cash terms, but after adjusting for inflation running at around 3.1 percent at the time, the real gain was just 0.1 percent.

The picture matters for the Bank of England, which faces a genuinely difficult trade-off. On one side, inflation remains above target and is projected to rise further as the energy shock feeds through to utility bills, transport costs and food prices. On the other, the labour market is weakening and real wage growth has stalled, which limits the risk that pay demands will sustain inflationary pressure over time. The 2022 episode, when a tight labour market amplified an energy shock into a broader wage-price spiral, does not appear to be repeating: hiring is contracting, vacancy rates are falling, and workers' bargaining power is considerably weaker. The Bank held rates at 3.75 percent at its April meeting with an 8-1 vote, but with two members already signalling a preference for an increase, the June decision was shaping up as a closer call.