15 May 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP
Strong GDP growth in Q1 likely flatters underlying conditions
- UK GDP rose further in March, building on February’s significant increase in activity. March's gain left GDP up 0.7% quarter-on-quarter in Q1, a substantial step up from the soft end to 2024.
- Q1's strong performance was likely boosted by some residual seasonality, which suggests quarterly GDP growth across the rest of the year is likely to slow. Tighter fiscal policy, the lagged effect of past interest rate rises and higher US tariffs mean the underlying pace of output growth is likely to remain relatively muted this year.
Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “Building on the strong gain registered in February, GDP rose a further 0.2% month-on-month in March, comfortably beating expectations. At the sectoral level, the story was largely one of noisy data. On the upside, there was a relatively broad-based increase in activity across the consumer-facing services and other services sectors. Meanwhile, the construction sector grew modestly for the second consecutive month. These increases were more than enough to offset some challenges in the manufacturing sector, after an unusually strong outturn in February.
“Given March's higher reading, quarter-on-quarter GDP growth rose 0.7% in Q1. However, the first cut of the expenditure breakdown painted a slightly more pessimistic picture. There was an unusually large pick-up in business investment, which reversed a surprisingly substantial fall in the previous quarter. Meanwhile, strength in net exports could reflect some last-minute stockpiling before US tariffs came into force. Consumer spending remained soft with early signs of some consumer caution at the start of the year.
“Looking ahead, quarterly GDP growth across the rest of this year is likely to be slower than in Q1. In part, this is because the activity data in Q1 was probably boosted by some residual seasonality. However, tighter fiscal policy, the lagged effect of past interest rate rises, and the imposition of higher US tariffs on goods exports from the UK and the rest of the world mean we also expect the underlying pace of output growth to remain modest throughout this year.”