On Monday the Office for National Statistics (ONS) confirmed that the UK economy grew by 0.7% in the first quarter of the year, as measured by Gross Domestic Product (GDP). That may sound impressive and was certainly better than most had expected a few months earlier. But unfortunately, it was as good as it gets.
The data should come with at least three health warnings.
First, there are questions about the reliability of the ONS data. In particular, there is a suspicious pattern in the GDP numbers. As Chart 1 shows, growth has been strongest in the first quarter of the year in each of the last three years, before tailing off sharply, even though the numbers are supposed to adjust for any seasonal distortions.
This pattern might be pure chance, or a legacy of the extraordinary swings in activity during the pandemic. Either way, it is worth noting that GDP growth in the first quarter of 2024 was even stronger, at 0.9%.
Second, growth in the first quarter of 2025 was boosted by some temporary factors. Many firms brought forward activity to avoid the tariffs that President Trump was widely expected to impose in the Spring. This led to an increase in business investment and exports, both positive for GDP.
This phenomenon was seen in the rest of Europe too. Most strikingly, the Irish economy grew by nearly 10% in the first quarter, driven by a surge in exports of goods, notably pharmaceuticals, to the US.
The UK economy also received a short-lived boost from the rush to complete property purchases ahead of changes to stamp duty on 1April, when the tax-free thresholds were lowered. (The latest estate agents surveys and house price data show that the residential market has since fallen back.)
The upshot is that the headline GDP numbers overstated the strength of the economy in the first quarter. Surveys of private businesses, such as the Purchasing Managers’ Index (PMI), probably provide a more accurate picture. As Chart 2 illustrates, they confirm that underlying growth has been much weaker.
Third, the first quarter is now, of course, ‘old news’. We already know that the second quarter got off to a bad start, with the first estimate of monthly GDP suggesting that the economy shrunk by 0.3% in April alone.
This partly reflected the unwinding of the temporary factors that had boosted GDP in the first quarter, such as the anticipation of US tariffs and stamp duty changes. But there were new shocks too, led by the increases in employers National Insurance and in the national minimum wage.
As Chart 3 shows, higher payrolls costs have contributed to a sharp downturn in the labour market, which already appears to be falling off a cliff. Food and energy bills have risen further too.
All is not necessarily lost. Some surveys (including the latest Lloyds Business Barometer, as well as the PMIs) suggest that business confidence is stabilising again or even recovering slightly, including hiring intentions, as fears of a global trade war and the initial shock of the jump in payroll costs subside.
The cooling job market will also make it easier for the Bank of England to keep cutting interest rates, despite higher inflation. Altogether, this should make a recession much less likely.
However, underlying growth remains sluggish, at best. The UK economy is set to grow by little more than 1% over 2025 as a whole, little changed from last year, and well short of the numbers needed to fix the public finances.
With no sign that government spending is being brought back under control, Rachel Reeves (or her successor) will almost certainly have to come back with even more tax increases in the Autumn Budget, especially after the u-turns on winter fuel payments and welfare reforms.
In the meantime, business and consumer confidence are still fragile, and global uncertainty remains high (trade war fears may just be replaced by worries over the US public finances).
In short, the apparently strong growth in the first quarter is now well behind us. The UK economy is already teetering on the brink again, and it may not take much more to push it over.
Plain-speaking Economics 