GDP growth records best result since Q1 2024 in the first quarter

Underlying picture less positive than headline reading: GDP growth improved to 0.7% on a seasonally adjusted quarter on quarter basis in the first quarter, from 0.1% in the fourth quarter of last year and marking the strongest increase since Q1 2024. Unseasonably warm weather boosting services, plus export front-loading and inventory stocking ahead of U.S. tariff hikes likely all boosted the Q1 figure. Moreover, recent years have seen a pattern of a strong Q1 outturn followed by weaker momentum later in the year, hinting at possible issues with the seasonal adjustment of data. As a result, underlying momentum once stripping out these factors was weaker than the headline reading suggests. On an annual basis, economic growth edged down to 1.3% in Q1 from the previous period's 1.5% growth.

Broad-based improvement: The upturn reflected improvements in private consumption, fixed investment and exports. Private consumption increased 0.2% in the first quarter, which was above the fourth quarter's 0.1% expansion. Meanwhile, fixed investment bounced back, growing 2.9% in Q1, contrasting the 0.6% decrease recorded in the previous quarter. Public consumption dropped 0.5% (Q4 2024: +0.5% s.a. qoq). On the external front, exports of goods and services rebounded, growing 3.5% seasonally adjusted quarter on quarter in the first quarter, which marked the best reading since Q3 2022 (Q4 2024: -1.8% s.a. qoq). Conversely, imports of goods and services growth moderated to 2.1% in Q1 (Q4 2024: +2.9% s.a. qoq).

GDP outlook: As in 2022, 2023 and 2024, our Consensus is for slower economic growth in the remainder of the year relative to Q1. The fallout from U.S. trade tariffs, plus payback following front-loading and stockpiling in the first quarter, will hit activity. However, looser monetary policy will provide support.

Panelist insight: On the latest data, Nomura analysts said: “The strong q-o-q is probably not a good reflection of the underlying rate of GDP growth in Q1. In its Monetary Policy Report […] the BoE said that it believed GDP growth has been slowing since mid-2024, and thought that underlying growth in Q1 was broadly flat (based on the evolution of the business surveys) – substantially less than [Q1’s] reported figure.” On the outlook, ING’s James Smith said: “The UK outlook does look 'ok', even if first-quarter GDP probably heavily overstates the underlying pace of growth. Uncertainty surrounding global trade is a headwind, though the direct impact of tariffs on the UK looks negligible. Remember too that government spending is rising significantly this year and that will be a firm tailwind. Real wage growth has also been consistently positive, even if this hasn’t fully translated into consumer spending growth over the past year or two. And though the jobs market is cooling, we've not seen a rise in layoffs as a result of the recent National Insurance (social security) hike, despite plenty of pessimism in hiring surveys over recent months.”

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