The UK economy roared into 2025 with its strongest quarterly growth in a year, lifted by a rebound in services, a surge in business investment and a sharp rise in exports to the US. Car leasing, advertising and industrial production all contributed to the unexpectedly buoyant start.

But the strong start may not last. Some of the growth came from businesses acting early to avoid new US tariffs, and the months ahead bring fresh tax rises and global uncertainty. Inflation is rising again, productivity is slowing and, despite lower interest rates, confidence among consumers and businesses remains weak. Is this the start of a true recovery – or just a short-lived bounce?

Resurgent first quarter for UK economy unlikely to last

Official figures from the Office for National Statistics (ONS) revealed that UK GDP grew by 0.7% in the first quarter of 2025 (see Chart 1), the fastest growth since Q1 2024 and up sharply from growth of 0.1% in the previous quarter. The service sector was a key driver of this rebound, growing by 0.7%, with wholesale, retail and computer programming all having a strong quarter, as did car leasing and advertising. Industrial production is estimated to have grown by 1.1%, following falls in the previous three quarters. Business investment is estimated to have increased by 5.9% in the first quarter. 

The robust quarterly GDP reading is probably the high point for economic growth this year, with activity likely to slow sharply in the second quarter as tax and tariff rises and global uncertainty bite.

UK exports to US rise sharply

The UK’s trade deficit in goods and services narrowed by £3.6bn to a deficit of £6.6bn in Q1 2025, compared with the previous quarter. This improvement was driven by a £4.3bn narrowing in the goods deficit, which more than offset a £0.7bn tightening in the services surplus. Exports of goods to the US increased for the fourth consecutive month in March, with a £2.4bn rise to £17.5bn in Q1 2025, the highest level since Q4 2022 (see Chart 2).

The nature of the Q1 increases in GDP, business investment and exports suggest that some businesses brought forward activity ahead of the original US tariffs taking effect. This included stronger output from some sectors targeted by those initial tariff announcements such as spending on IT equipment and machinery, and car exports to the US.

UK productivity growth slows

UK productivity growth – as measured by output per hour worked – rose by 0.2% in Q1 2025, down from growth of 0.7% in Q4 2024. As a result, productivity in the UK is now only 2.1% above its 2019 level. In 2024, the construction and IT industries made the largest upward contribution to productivity growth in comparison with the 2019 figures (see chart 3). The health industry made the largest negative contribution to productivity growth over the same period. Poor productivity remains the biggest barrier to the UK government meeting its ambition to significantly uplift the UK’s growth trajectory.

Inflation surges in ‘Awful April’

UK CPI inflation stood at 3.5% in April 2025, the highest rate since January 2024 and up sharply from 2.6% in March. This increase was mainly driven by a multitude of bill rises and tax hikes that led to last month being labelled ‘Awful April’. The biggest culprit was rising energy prices due to the increase in the Ofgem energy price cap. Prices of electricity, gas and other fuels rose by 6.7% in the year to April. Gas prices rose by 7.5% on the month, compared with a fall of 15.8% a year ago. Electricity prices rose by 2.9%, compared with a fall of 10.2% a year ago. While inflation should stay above 3% for a while, it could start drifting downwards as lower energy bills kick in, assisted by July’s fall in Ofgem’s energy price cap.

UK interest rates cut to 4.25%

The Bank of England cut interest rates from 4.50% to 4.25%, the lowest level since March 2023. The Monetary Policy Committee members voted 5-4 in favour of this outcome, with two dissenters voting for a bigger 50 basis points cut and the other two voting to keep policy on hold. While this reduction confirms that UK interest rates are trending downwards, it won’t materially reverse the financial squeeze or slide in sentiment among households and firms, given that many other costs are rising, and global headwinds are still elevated. April’s inflation figures probably rule out a June rate cut and while policymakers should view last month’s spike as a temporary blip, the size of the increase means an August policy loosening is far from a done deal.

Implications for accountants, business owners and the economy

Overall, UK economic performance in the first quarter overstates the underlying pace of growth as it’s a reflection of temporary factors, such as some businesses bringing forward activity ahead of the original US tariffs taking effect, rather than the economic reality on the ground for consumers and businesses.

UK economy – what to watch for next month

1. On 11 June, the UK government will publish its Comprehensive Spending Review, setting out detailed spending plans for individual departments for the next three years.
2. The April 2025 UK GDP data to be released on 12 June is the first economy-wide data covering the impact of US tariffs.
3. On 19 June, the Bank of England’s Monetary Policy Committee is likely to keep interest rates on hold at 4.25%.