The UK economy defied expectations in February, bouncing back with its fastest growth in nearly a year. Tech firms, telecoms providers and car dealerships drove the surge, while manufacturing and pharmaceuticals shook off months of sluggishness.

This burst of activity points to a stronger start to the year, but the road ahead looks far less certain. Inflation is poised to rise again, business confidence is falling and new US tariffs threaten to disrupt trade. As costs climb and pressure builds, is this recovery just a blip, or the start of a more resilient economic rebound?

UK economy performed better than expected in February

The UK economy grew by 0.5% in February 2025 according to official figures, the strongest expansion since March 2024 and up from zero GDP growth in January. The strong outturn for February was largely due to strong activity from computer programming, telecoms and car dealerships. Output from manufacturing, electronics and pharmaceutical businesses and the car-making industry also picked up after a period of weak activity. February’s uptick should mean a notably positive first quarter for the UK economy, with modest growth in March likely, possibly aided by a temporary boost from some companies bringing forward activity ahead of the US tariffs taking effect.

Inflation drop only a temporary reprieve as April surge looms

UK CPI inflation stood at 2.6% in March 2025, down from 2.8% in February. The largest downward pressure on the headline rate came from falling fuel prices. March’s inflation drop is only a temporary reprieve as a hefty increase is already nailed on for April, with rising household costs – including higher energy and water bills – and surging business expenses such as higher national insurance likely to lift inflation to around 3.5%.

Business sentiment turns negative

ICAEW’s Business Confidence Monitor (BCM) for Q1 2025 put confidence at -3.0 on the index, the weakest reading since Q4 2022 and down from 0.2 in the previous quarter (see chart 1). The notable fall in confidence was likely to be driven by record high tax worries, rising cost pressures and a slowdown in expected domestic sales growth. Historically, negative confidence readings have generally coincided with particularly difficult periods for the UK economy, including the major inflation shock in 2022 following Russia’s invasion of Ukraine.

More than half of businesses (56%) polled in Q1 said the tax burden was a growing challenge, a new record for the survey (see chart 2) and a considerable increase on the previous all-time high of 41% in Q4 2024. This was also three times higher than the historic average and a seven-fold increase over the past four years.

Major differences in sentiment across sectors

The latest BCM found significant differences in confidence across the economy, with sentiment negative in six of the 11 sectors surveyed. Improvements in some segments of the economy were overshadowed by a torrid quarter for those sectors most vulnerable to these tax and tariff rises. Manufacturing and engineering firms were hardest hit with sentiment dropping to -11.1 on the index, followed by property (-10.3) and retail and wholesale (-8.4). In contrast, confidence rose in three sectors: IT and communications (10), construction (7.8) and energy, water and mining (6.9). The buoyancy in construction is likely to be linked to the government’s commitment to house-building targets and planning reform.

Pay growth holding up for now

The UK unemployment rate held steady at 4.4% in the three months to February 2025. The estimated number of job vacancies in the UK fell by 26,000 to 781,000 in January to March 2025, the 33rd consecutive quarterly decline. UK regular pay growth (excluding bonuses) was 5.9% in the three months to February 2025, up from 5.8% in the previous three-month period. With UK inflation lagging behind wage settlements, pay growth in real terms remains strong, helping to support people’s purchasing power. Real regular pay grew by 3.1% in February 2025, more than three times the decade average of 0.9% (see Chart 3).

US tariffs complicate UK’s economic outlook 

Trump’s tariffs have pushed the US effective tariff rate (average tariff paid across all US imports) up to its highest level in more than a century. The impact on the UK economy from Trump’s tariffs remains highly uncertain. In 2023, the UK exported £60.4bn of goods (2% of GDP) to the US, largely made up of cars, pharmaceuticals and machinery. Other industries with a big market in the US include fishing and electronics. By comparison, the UK exported £119bn worth of services to the US in the same year.

As things stand, UK economic growth is likely to be weaker as a global trade slowdown, disruption to international supply chains and greater uncertainty weigh on overall activity. However, while input costs for businesses may rise, prices for goods from countries such as China could fall as they seek to compete in alternative markets to the US. This could help to lower inflation over time, which is likely to provide the Bank of England with more room to cut interest rates as price pressures ease.

Implications for accountants, business owners and the economy

Taken together, these figures suggest that the mood music on the UK economy is turning increasingly sour as the damaging after-effects from this global turbulence further undermine an economy already reeling from April’s surge in business costs. With the forward-looking indicators of sales and employment activity from ICAEW’s BCM weakening, things may get worse before they get better.

UK economy – what to watch for next month:

1. On 8 May, the Bank of England’s Monetary Policy Committee could cut interest rates from 4.50% to 4.25%. Alongside its May policy decision, the bank will publish its latest economic forecasts for the UK economy. 
2. The quarterly GDP data to be released on 15 May could confirm that UK GDP growth picked up slightly in the first quarter of 2025, following 0.1% growth in Q4 2024.
3. The inflation figures for April due out on 21 May should see an increase in the headline rate from 2.6% in March to more than 3% in April.