I think it uses both GPS data and sign recognition. My driveway at home is only about 10 metres long,yet the 'Here' satnav displays it as an off road 'track' with no speed limit.(a grey roundel with two dashes) Soon after I join the public highway (which is a 30 mph limit) it displays a 30 mph roundel and would chime if I exceeded it. I am fairly sure this is before I have passed any 30 mph roundel that it could have read. . So the system either uses gps data ,or somehow remembers the limit was 30 mph when I previously left that road. . I think if someone put a 20 mph roundel on their dustbin it would read that and display 20 mph instead . I dont know what would happen if someone falsely displayed a convincing roundel higher than the applicable limit.
The newer mk4's where speed alerts are compulsory have "Here" satnav, not Garmin. I think I read on this site that its more compatible with the alert system. It does make sense to use GPS at times as many Urban areas in the UK and on the continent rely more on the drivers knowing they are within an urban speed area because of village name boards, presence of lamp posts etc rather than displaying numerous speed limit signs all over town.