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The UK’s burst of strong economic growth at the start of the year is beginning to fizzle out as the jobs market weakens, the trade shock bites and higher taxes dampen business optimism, analysts warned.
If the slowdown continues, 2025 would mark the fourth year in a row in which the British economy fails to sustain its early momentum after an auspicious start to the year.
While GDP growth was strong at 0.7 per cent in the first quarter, analysts polled by Reuters forecast GDP will barely grow in the current quarter, picking up only slightly later in the year.
The danger of subsiding growth was underscored by a steep slide in retail sales in May shown in official data released on Friday, which means sales have lost all the ground gained in four months of growth earlier in the year.
That came a day after a downbeat assessment of the mood among businesses by the Bank of England’s network of regional agents, which showed firms in sectors including retail, manufacturing and construction expect no rebound in customer demand this year.
“The risk is we are seeing a dispiritingly familiar pattern in the UK of a strong first quarter before things fizzle out,” said George Buckley, an economist at Nomura.
“The UK saw a strong start to the year but it was driven by one-off factors that do not look sustainable and we are now looking at weak growth for the rest of the year,” he added.
The BoE warned of weak growth as it left interest rates unchanged on Thursday, in a decision that pointed to increasing concerns within the central bank about the outlook for jobs and unemployment.
Businesses are being hit by a “wave of cost increases” driven by government policy, the BoE’s network of agents reported, including Labour’s decision to increase employer national insurance, the rise in the national living wage, and tougher packaging recycling regulations.
Firms are encountering only mixed success in passing on those cost rises, meaning many companies are bearing down on employee headcount and working hours as well as wage settlements, leading the BoE to flag “clearer evidence” of slack in the jobs market.
The bank noted that the single-month contraction in payrolled employment in May of 109,000 was the steepest since May 2020, when the country was under Covid-19 restrictions.
The downbeat assessment was notable given how strongly the UK performed in the opening three months of the year. But the first quarter was heavily influenced by frontloading of trade and investment around the world ahead of Donald Trump’s global tariff war.
Net trade was the largest contributor to growth in the quarter, accounting for 0.6 percentage points, with another 0.2 percentage points from the change in inventories. Household consumption was up only 0.2 per cent in the first three months.
Trade-induced policy uncertainty and higher taxes and tight monetary policy are set to weigh on the economy for the remainder of the year, analysts said.
If so, the pattern will be a well-established one. Since the pandemic, UK GDP growth has been consistently stronger in the first quarter than in the following ones. For example, in 2024, a strong 0.9 per cent expansion at the start of the year was followed by stagnation in the second half.
That came even after former Conservative chancellor Jeremy Hunt cut national insurance for the second fiscal event in a row, a move that was intended to give the economy a burst of energy going into the election.
This year, if anything the pressures on the UK economy are more acute given Reeves’ £40bn tax hikes and the Trump-induced trade shock, said Neville Hill, co-founder of consultancy Hybrid Economics.
“We have to wait until the jury is out at the end if the year, but it feels horribly familiar that a great start to the year has fizzled out,” said Hill.
The repeat pattern could be down to difficulties adjusting for seasonal factors, economists said. However an assessment by the Office for National Statistics last month found that “there is no residual seasonality in the main aggregate outputs” for quarterly and monthly GDP.
Instead, the pattern may be down to idiosyncratic reasons in individual years after the impact of the pandemic faded, said Buckley of Nomura. But it underscores the difficulty the UK is having in breaking free of a cycle of listless growth.
Economists stressed that it is too soon to write off 2025 given there is still relatively little hard data tracking the second quarter of the year. Consumers have hefty savings to draw on and are experiencing ongoing real wage growth, which could tee up stronger spending as the year progresses.
“It is still a little early to throw in the towel and conclude that the weakness in the labour market is causing consumer demand to falter,” said Andrew Wishart at Berenberg Bank.
Nevertheless, analysts said they would not be surprised if the burst of activity early this year proves shortlived. “There is frankly not a lot of encouraging data out there at the moment,” said Buckley.
Data visualisation by Keith Fray
