17 April 2026: Production output was mixed before the war in Iran

The publication of Industrial and manufacturing data yesterday painted a mixed picture of the economy before everything was “turned upside down” by the war in Iran.

The Office for National Statistics announced that UK industrial output in February rose 0.5%, beating market expectations for a 0.2% increase. This compared favourably with a previous decline of 0.1%. Year-on-year, output in February reversed a 0.4% decrease. Meanwhile, manufacturing output in February fell 0.1%, missing market expectations for a 0.3% increase. The previous reading was revised upward to a 0.2% increase.

For many manufacturers, the key question is not whether an opportunity exists to grow their business, but whether their operations are structured to capitalise on it. With growing demand across sectors such as aerospace, automotive, and high-precision engineering, firms must ensure their production systems can scale efficiently.

This requires not only the right workforce and technology but also integrated, data-driven decision-making and greater process automation to convert opportunities into profitable, sustainable growth. Without these foundations, even promising market conditions may be difficult to capitalise on.

According to fresh data from the Office for National Statistics, Britain's economy expanded by 0.5 percent in February, marking the strongest monthly performance since December 2024.

The figures exceeded expectations, with most economists predicting growth of just 0.1 percent.

The ongoing conflict in the Middle East is casting a long shadow over the UK's economic outlook, with soaring energy costs and supply chain disruptions threatening to undo any momentum gained earlier in the year.

The data may already be out of date, given fears that the conflict could trigger a global recession. As a net energy importer, Britain remains particularly vulnerable to global price shocks from the blockade of the Strait of Hormuz.

Following the news earlier this week that the IMF predicted the UK would be the worst-affected G7 economy from the shock of the Middle East war, and recent headlines suggesting the UK could face some food shortages by the summer, Rachel Reeves has received welcome relief from data showing the economy is performing slightly better than expected.

Reacting to the news, the Chancellor was careful not to overstate the improvement: “These growth figures show the Government has the right plan to build a stronger, more resilient economy. But the war in Iran will come at a cost. That is why we are taking the right, fair and necessary action to protect families and businesses.”

Reeves knows the outlook remains fragile and heavily dependent on external factors beyond the Government’s control. This has led her to adopt a stronger stance, blaming international politics as a key driver of the UK’s economic instability.

This week, she has gone further than before in explicitly criticising President Trump’s role in escalating tensions. Trump’s approach, she has argued, has intensified instability, driven up energy costs and undermined global confidence at a moment when economies were only just emerging from the inflation shock of recent years.

She has called the war a “mistake” that has not made the world “safer today than we were a few weeks ago”.

Sterling’s performance was soft but stable, with small declines across most major pairs. No sharp volatility was reported; the moves were incremental and consistent with a mild risk-off tone in global markets.

The pound fell to lows of 1.3516 and 1.1477 versus the dollar and Euro, respectively, and closed at 1.3525 and 1.1481.

After repeatedly indicating for the better part of a year that conditions called for the Federal Reserve to lower rates, Treasury Secretary Scott Bessent has a new message: It’s all right for the US central bank to hold off.

Twice in two days, Bessent said he would understand if the Fed doesn’t proceed with reducing borrowing costs as it awaits more information about the impact of the war in Iran on the US.

“If they need, for their own sanity, to wait on interest-rate cuts, I understand it,” Bessent said on CNBC yesterday. The day before, he told reporters during a roundtable that “if they want to wait for some clarity, I understand that.”

The immediate backdrop is the surge in energy prices. Last week’s CPI inflation report showed the biggest monthly jump in the headline gauge since 2022. While the core CPI suggested there’s little to worry about, the other main monthly price measure, PCE, has lately pointed to ongoing price pressures, adding to the case for patience among US monetary policymakers.

Bessent told CNBC that once energy costs come back down, “that once gasoline prices fall, they’re just going to be able to do more” concerning rate cuts.

This was a welcome dose of reality from a member of Trump’s “inner cabinet”, although it is doubtful that the President will see it that way.

Beyond the data, though, there’s another bit of context for the Treasury chief’s comments: Time is ticking down towards the end of Jerome Powell’s official term as Fed Chair, and, assuming the Trump administration can somehow get past a roadblock to his Senate confirmation, which is by no means certain given the depth of feeling against Trump’s insistence on politicising monetary policy, the beginning of Kevin Warsh’s turn at the helm.

If Warsh is in place by the June policy meeting, that may be a little early for a majority of the FOMC to support resuming rate cuts. While oil prices have come off the recent-week highs, they remain substantially above February levels. Bessent himself indicated on Wednesday that it might take some time for gasoline prices to come down.

If a majority of the FOMC isn’t quite ready to back rate cuts, the question for Warsh would be whether he should call for a reduction anyway, as President Donald Trump has long called for, and be outvoted. That would be an event the Fed hasn’t seen in decades, not since Paul Volcker’s stewardship.

If Warsh goes “against the grain” calling for a rate cut when the data says otherwise, he may simply be confirming market fears that he is, in fact, Trump’s “poodle”.

Trump’s current “poodle”, Stephen Miran, has been calling for three or occasionally four rate cuts this year. This view is at odds with other Fed officials, who warn that the energy shock could delay cuts, possibly until 2027. Yesterday, he acknowledged that conditions are currently more unpredictable, but expressed confidence that core goods and housing inflation will continue to fall.

Miran said that rising energy prices have not affected inflation projections for the next 12 to 18 months, and projected that 12-month PCE inflation may fall to the 2% target within a year. He also noted that there is no evidence of a wage-price spiral and that inflation expectations remain unchanged.

The U.S. dollar was slightly stronger yesterday, with the Dollar Index edging up by roughly 0.05%, reflecting a modest firming against major currencies.

The dollar’s rise occurred amid shifting geopolitical expectations, including hopes for easing tensions in the Middle East, which influenced risk appetite and bond markets. Despite the daily gain, the broader trend shows the dollar has been under mild pressure recently, with the index down over the past week. Yesterday it rose to a high of 98.29 and closed at 98.21.

ECB policymakers were wary of raising interest rates prematurely when they met last month amid growing fears of a new energy-driven surge in Eurozone inflation, accounts of the gathering showed on Thursday.

The ECB kept its key interest rate at 2% at ⁠the March 18-19 meeting, and policymakers are inclined to do so again this month, judging that they don't ‌have enough evidence to conclude that ‌the Iran war would durably raise inflation in the bloc.

The Central Bank's baseline projections, published at the time of the March meeting, assumed the hit from the Iran ​war would be short-lived. But they were accompanied by adverse and severe scenarios that involve a sharper increase in energy prices, greater uncertainty, and international spillovers.

"Incoming data should ⁠then be monitored to assess which scenario seemed to be crystallising, thereby facilitating swift policy action if necessary," the ECB ​said in its account of the meeting.

"At the same time, it was important not to act prematurely based upon adverse or ​severe scenarios, unless incoming data suggested that they ‌were becoming increasingly likely."

Policymakers hoped to have more information on the war's duration and scope at their April 29-30 meeting. However, they acknowledged that it may still be too early to conclude the implications for inflation.

They said they would monitor inflation expectations, selling prices, companies' profits, labour market data, underlying inflation figures, and supply chain disruptions as key factors.

"All of this would help to assess whether developments were moving in line with the baseline outlook or ‌one of the scenarios, even though it might still be difficult to judge whether there was a threat to the price stability objective," ‌the ECB said.

ECB President Christine Lagarde has since said the Central Bank would respond forcefully or persistently if inflation looked set to sit well above its 2% target for an extended period. Still, even a more modest overshoot could call for a "measured" rate move.

Meanwhile, the Bank’s “resident hawk,” German bond expert and economist, told reporters that now is a “good time” to debate joint European Union borrowing again.

Schnabel told a panel event in Washington that it’s “entirely logical” for the EU to finance European public goods by issuing common debt. Still, officials should first reinforce the bloc’s economic and military power.

“We had a similar discussion something like 15 years ago, and many proposals were made, discussed, and in the end discarded,” she said yesterday. “But the world has changed, and so we should come back and discuss it again.”

As support from the US wanes under President Donald Trump, Europe is looking to bolster its autonomy through initiatives to overhaul its militaries, streamline its economy, and boost the global appeal of the euro.

Schnabel has joined Bundesbank President Joachim Nagel in voicing support for common borrowing, though the government in Berlin isn’t so eager to back the idea.

Schnabel also expressed reservations about the latest suggestions for joint debt.

“In the current proposal, there is no mechanism to enforce the market discipline that I believe is needed to deal with the moral hazard,” she said. “And I think that is an issue.”

Yesterday, the euro declined modestly, losing roughly 0.15–0.25% against the dollar. The move was modest but directionally clear: a slightly weaker euro and a slightly stronger dollar.

Markets have been adjusting expectations for ECB tightening, with traders scaling back the number of expected rate hikes, a mild headwind for the euro.

Improved sentiment around U.S.–Iran diplomatic efforts has eased oil prices and supported the dollar, indirectly pressuring the euro.

The common currency fell to a low of 1.1767 and closed at 1.1780.80.

Have a great day!