A Resilient Second Quarter for the UK Economy
Britain’s economy performed better than expected in the second quarter of 2025, weathering the impact of new US tariffs and a higher UK business tax. Official data from the Office for National Statistics (ONS) showed that gross domestic product (GDP) grew by 0.3% in the April-June period. This figure significantly beat analyst forecasts of just 0.1% growth, even though it represented a slowdown from the more robust 0.7% growth seen in the first three months of the year.
Finance Minister Rachel Reeves hailed the figures as “positive with a strong start to the year and continued growth in the second quarter.” However, she acknowledged that there is “more to do” to deliver on the Labour government’s promise of an economy that works for its citizens, a statement that comes after a difficult first year in power as the economy has struggled to grow significantly.
Navigating US Tariffs and a New UK Business Tax
The UK economy faced a number of significant headwinds in the second quarter. From April, the country became subject to US President Donald Trump’s 10% baseline tariff on most goods, a policy that was expected to have a drag on the nation’s economic output. Simultaneously, Prime Minister Keir Starmer’s government increased a UK business tax, a move that put additional pressure on companies already facing a challenging economic climate. These twin challenges occurred as official data showed UK unemployment at a four-year high of 4.7% in the second quarter. The combination of these factors created a difficult environment for growth, making the ONS report’s positive outcome a welcome surprise for the government and the markets.
Services and Construction Lead the Way
Despite the tariffs and tax hikes, the UK economy found a way to grow. According to ONS data, the growth was primarily led by the services and construction sectors, which helped to offset a drop in production. Liz McKeown, the ONS director of economic statistics, noted that “growth was led by services, with computer programming, health, and vehicle leasing growing.”
This expansion in key service industries was enough to provide a floor for the economy and demonstrate its resilience in the face of external pressures. The growth in services, which make up a significant portion of the UK economy, is a positive sign that the country is capable of adapting to new challenges and finding new avenues for expansion.
The Impact of a Favourable Trade Agreement
While the initial introduction of US tariffs was a major drag on the economy, a diplomatic solution helped to mitigate some of the impact. London and Washington reached an agreement in May to cut levies of more than 10% on certain UK-made items imported by the United States, most notably vehicles. Danni Hewson, head of financial analysis at AJ Bell, noted that this “favourable trade agreement” enabled output to “pick up again as June showed growth in all sectors, including manufacturing.”
This turnaround in June was a crucial factor in the overall GDP performance for the second quarter and provided a glimpse into how a strategic trade agreement can help to protect key industries from the negative effects of new tariffs.
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Assessing the Tariffs Fallout on UK Exports
Despite the positive turnaround in June, the full drag of the US tariffs was still felt by UK exporters. The ONS reported that exports of goods to the United States fell by £700 million ($950 million) in the month, reaching their lowest level since February 2022. This figure highlights that the trade agreement, while helpful, did not fully reverse the negative impact of the tariffs. The ONS noted that the value of goods exports to the US has “remained relatively low since the introduction of tariffs in April.”
This suggests that tariffs remain a drag on a key part of the UK economy and that companies are still struggling to adapt to the new trade environment. The full drag on business investment from the new tax hikes has also yet to be felt, which could create new challenges in the months to come.
Monetary Policy and the Bank of England’s Dilemma
The better-than-expected economic figures have created a new dilemma for the Bank of England. Citing threats to growth from US tariffs, the bank had recently cut its key interest rate by a quarter point to four percent. However, the new ONS data could influence future policy decisions. Susannah Streeter, head of money and markets at Hargreaves Lansdown, noted that “evidence of a more resilient economy may mean that the Bank of England policymakers are that bit more reticent about cutting interest rates in the months to come.” This creates a tension between the need to support a slowing economy and the need to manage inflation. The Bank of England will now have to carefully weigh its options and decide whether the economy is strong enough to withstand another pause in rate cuts.
UK Economy Faces Global and Domestic Headwinds
The UK economy still faces a number of challenges. Ruth Gregory, deputy chief UK economist at Capital Economics, warned that “the weak global economy will remain a drag on UK GDP growth for a while yet.” She also noted that the “full drag on business investment from April’s tax rises has yet to be felt.”
Furthermore, the ongoing speculation about further tax rises in the UK autumn budget will likely keep consumers in a cautious mood, which could stifle future growth. The challenge for the Labour government is to navigate these headwinds and to find a way to deliver on its promise of a more resilient and prosperous economy. The government’s ability to balance the need for new revenue with the need to stimulate economic growth will be a crucial factor in determining the UK’s economic future.
