UK economy grew more than expected in first three months of 2025

The UK economy grew again in March, surprising most analysts, with widespread growth in the services sector contributing the most to growth.

GDP grew by 0.7% from January to March 2025, according to the latest data from the Office for National Statistics (ONS), and grew by 0.2% month-on-month.

Growth of 0.7% far outpaced disappointing figures from the last quarter of 2024, where economic growth sat at just 0.1%.

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It also beat the consensus expectations of many analysts and economists who expected growth to sit closer to 0.6% when polled by Reuters.

Looking at month-on-month figures, the ONS’ data shows that the UK economy grew by 0.2% in March alone, following growth of 0.5% in February and no growth in January.

Britain’s services sector was a significant driving force behind increased economic growth as it is estimated to have grown by 0.7% in the first quarter of 2025. Overall, the ONS observed growth in 10 out of the 14 sub-sectors of the services industry in the first three months of the year.

The GDP data could also indicate that the Bank of England’s decision to lower interest rates is paying off.

This set of data is the first quarterly figure to include February’s interest rate cut to 4.5%.

The bank’s Monetary Policy Committee (MPC) decided to hold interest rates steady in March, but cut them again in May to 4.25%, but the impact of this second cut on GDP will only be seen in the next set of quarterly data.

News that the economy is growing will come as a boost to the prime minister and chancellor who have put economic growth at the centre of their agenda in government.

Chancellor Rachel Reeves said today’s figures “show the strength and potential of the UK economy” – pointing out that, in the first three months of the year, the UK economy has grown faster than the US, Canada, France, Italy and Germany.

She added: “Up against a backdrop of global uncertainty we are making the right choices in the national interest”.

The same sentiment was echoed by prime minister Sir Keir Starmer who wrote on X: “The UK now has the fastest growth in the G7 – our Plan for Change in action. We've had four interest rate cuts since July [2024] and wages are rising faster than prices.”

Both Reeves and Starmer added that there is still more to do to keep the economy growing and that they will “go further and faster” to make working people better off.

Will the UK economy keep growing?

Though news of a growing UK economy was welcomed by most commentators, the prospect of whether the growth will persist is uncertain.

Sanjay Raja, chief UK economist at Deutsche Bank, said “the jump in GDP will likely be short-lived”.

Raja’s reasoning is that trade uncertainty from Trump's tariffs will likely hit its peak in the second quarter of 2025 as exporters are likely to see reduced demand from higher US tariffs and weaker global demand.

He also cited recent figures that UK wage growth is slowing while unemployment is rising and the jobs market is contracting.

“Crucially, higher unemployment and a drop off in real wage growth won’t help household spending much either, as firms continue to tighten payrolls and pass on payroll cost increases,” Raja said.

Lindsay James, investment strategist at Quilter shared a similar sentiment, saying: “The stronger GDP data is welcome news, but the bigger question is whether it represents the start of a more durable recovery or simply a temporary rebound.

“Much will depend on the path of inflation, wage growth, and whether fiscal policy becomes more accommodative. For now, the UK economy is outperforming modest expectations – but the road to sustained growth remains uncertain.”

This caution over the future of GDP growth is also shared by the Bank of England who said in their May Monetary Policy Report that they expect economic growth in the first quarter of the year to be “significantly above the estimated pace of underlying growth”.

Furthermore, this latest set of GDP figures does not include any data collected after the new tax year began in April. This means that the impact of policies like rising employer national insurance contributions and a higher minimum wage, are yet to be seen.

The next quarterly set of GDP data will be a crucial point for the government’s industrial strategy as they will have to face the potential repercussions that increasing business costs could have on economic growth.

How will Trump tariffs affect UK GDP growth?

Apart from increased business costs, the next quarter’s GDP figures will also have to contend with the disruptions to world trade brought by Donald Trump’s new tariff regime.

Though the UK will still be subject to blanket 10% tariffs on most goods exported to the US, a trade deal announced with the US on 8 May includes the removal of some significant trade barriers.

In particular, the deal included the complete removal of US tariffs on UK steel and aluminium, which had been as high as 25%.

The US also agreed that 100,000 UK cars will be allowed into America on a tariff of just 10%, while cars over 100,000 will be subject to the usual 27.5% tariff.

Meanwhile, pharmaceuticals (the UK’s second largest export to the US) will also get “preferential treatment” as part of the deal, though there is no concrete data yet to say what this will mean in practice.

Trump has not announced any trade restrictions on medicines yet. However, there is an expectation he will in the coming weeks.

The US also signed a trade deal with China on 12 April which marked a significant deescalation of the trade war between the two countries.

For an initial period of 90 days, US tariffs on China will be reduced from 145% to 30%, and Chinese tariffs on US imports will be reduced from 125% to 10%.

Raja at Deutsche Bank says a UK trade deal with the US is “good news” for the future of British GDP growth.

He says Deutsche Bank estimates the US-UK deal will “shave off a couple percentage points in the UK’s effective tariff rate with the US, marginally narrowing the estimated hit from Liberation Day”.

He added that “further trade deals in recent days will also help reduce global trade uncertainty, reducing the drag from a weaker external backdrop”.

However, James at Quilter is less confident that the US-UK trade deal will have a substantial impact on future economic growth in the UK, saying that, though it is politically symbolic, it “is unlikely to deliver immediate economic dividends”.

“While tariffs on select goods such as steel and automotive parts have been eased, a 10% duty remains on many other exports, and concerns are already emerging that the deal could strain UK-China relations, particularly around sensitive technologies,” he added.