The UK's GDP growth of 0.7% in Q1 2025 is driven by resilient consumer activity and one-off stimuli like government spending and front-loaded exports. While this growth offers a brief reprieve for the governmentâs fiscal plans, it may not be sustainable, as the boost is temporary. Future challenges include rising trade tensions, US tariffs, and increased employment costs which threaten profits and hiring. The government's restrictive fiscal rules limit its response options, indicating a precarious economic outlook moving forward.
A key factor in this growth has been the resilience of consumer activity. Retail sales rose each month in Q1, driven by positive real earnings growth and favorable weather.
Despite the modest tariff victories on cars, steel, and aluminium, ongoing trade tensions and US tariffs will impact GDP later this year.
The elevated employment costs outlined in the Autumn Budget have begun to cut into businesses' profits and slow recruitment, complicating the economic outlook.
The Government appears to have boxed itself into a corner with existing fiscal rules that prevent it from raising taxes, despite the changing economic environment.
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