UK GDP surprises to the upside and outperforms US and Eurozone, but can it last?

There has been good economic news for the UK this morning. Q1 GDP was stronger than expected last quarter, rising 0.7%, vs. 0.6% expected, the annual rate is now 1.3%, down slightly from the 1.5% in Q4 2024, but still a robust level. The UK economy is now growing at a faster rate than the US and the Eurozone.

The drivers of this growth suggests that confidence is returning to the UK economy. government spending as a share of GDP fell, however, investment levels rose strongly, and exports grew at a faster rate than imports, which was most likely some front running ahead of President Trump’s reciprocal tariff announcement in April. The service sector also did the heavy lifting, and construction activity picked up sharply in March.

UK GDP per head receives a much needed boost

The monthly GDP report for March was also stronger than expected, with the GDP rate rising by 0.2%, led by service growth. The index of services in March grew by 0.4% vs. 0.1% expected. The 3-month on month rate of growth for services was 0.7%. Construction output was also stronger than expected for March, dry weather most likely helped boost construction, along with strong levels of capital investment spending. The trade deficit narrowed by £3.6bn, most likely caused by a boost to production to front run US trade levies.

The detail of this report shows that services and production all boosted growth,  and for the first time in more than two quarters, GDP per head rose by 0.5%, after declining in the second half of 2024. This is undoubtedly good news, and highlights the potential of the UK economy, after a sluggish period of growth in recent quarters.

While much of this growth is down to production, the consumer is also making a comeback after slump in confidence in the second half of last year. The ONS said that growth in services was broad based, with expansion across wholesale sales, retail and computer programming. Car leasing and advertising also registered decent growth last quarter. There was a slight fall in education service growth last quarter, possibly because of the VAT rise of private school fees and other costs imposed on private schools from January.

Expect lumpy GDP growth ahead

The question now is can this last? The Q1 data feels particularly backward looking, especially since the tariff turmoil since then.  We expected production to have slowed sharply in April, as companies such as Jaguar Land Rover halted production amid US tariff uncertainty. This is likely to weigh heavily on the monthly GDP figure for April. However, the trade deal between the UK and the US, signed in May, could see production ramp up again this month. The conclusion: expect GDP to be lumpy in Q2 and beyond.

Inflation and the UK/ US trade agreement

The risk is that the consumer, who has benefitted from elevated levels of pay in recent years, will still feel an impact from tariffs even after the US / UK trade deal, however, the extent of this is unknown at this stage. There is still a 10% tariff rate that will be applied to US imports; however, we do not know what that means for prices going forward. For example, US beef imports, which could grow under the new trade agreement with the US, could have a deflationary impact on meat prices. US farming is huge, they have massive economies of scale, so US imported beef could still be cheaper than UK beef.

UK GDP data reduces need for June rate cut

The impact on financial markets has been minimal so far. FTSE 100 futures are pointing to a lower open, in line with weakness in Asia, as the effect of the  US/ China trade agreement on financial markets starts to wane. The pound has extended gains, and GBP/USD is testing the key $1.33 level. Gilt yields are higher, by about 4 basis points across the curve, which is lending some support to sterling this morning. Overall, today’s data could spark a mini revival in the pound, as it suggests that a June rate cut from the BOE is unnecessary and they have the flexibility to wait until August before deciding what to do with interest rates.