The UK economy grew by 0.7 percent in Q1 2025, driven by services and manufacturing rebounds, but challenges like rising costs, U.S. tariffs and global uncertainties still loom.

by Xinhua writer Zhang Yadong

LONDON, May 17 (Xinhua) -- The UK economy in the first quarter of 2025 has exceeded market expectations with GDP rising by 0.7 percent quarter on quarter, showed data from the Office for National Statistics (ONS) on Thursday.

Earlier figures indicated stagnation in January and a 0.5-percent increase in February, and anticipated zero growth in March. However, the latest data revealed a 0.2-percent rise in March, lifting the overall quarterly result.

The service sector, the primary engine of growth, recorded a 0.7-percent increase, rebounding from just 0.1 percent in the final quarter of 2024, with wholesale, retail, transport and communications services making notable contributions.

Helen Dickinson, chief executive of the British Retail Consortium, said that falling shop price indices have been good news for UK households and that declining food prices and fierce competition among retailers helped bring down overall prices, supporting the continued growth of the services sector in the first quarter.

British manufacturing also surprised markets in the first quarter of 2025, ending three consecutive quarters of decline. According to the ONS, the rebound was largely driven by growth in the automotive and machinery sectors, with machinery manufacturing up 3.8 percent quarter on quarter and transport equipment production rising 2.7 percent. Analysts noted that a surge in output in February was likely due to firms rushing to ship goods ahead of new U.S. tariffs.

The construction sector, however, remained stagnant, showing no growth compared to the previous quarter and even hinting at a potential contraction.

The stronger-than-expected economic growth in the first quarter of 2025 has eased pressure on the UK government. Chancellor of the Exchequer Rachel Reeves said the results reflected the strength and potential of the UK economy, yet acknowledged that there is still much work to be done.

This growth, however, was recorded before new U.S. tariffs on UK goods took effect, the impact of which will become evident in the second quarter. Domestically, higher National Insurance rates, increases in the minimum wage and price hikes in some social services have prompted industry groups and research institutions to caution that the first quarter's performance may be short-lived. The 0.2-percent GDP growth in March was already a noticeable slowdown from February's 0.5 percent, suggesting tougher challenges ahead.

Stuart Morrison, research director at the British Chambers of Commerce (BCC), noted that the 0.7-percent growth exceeded expectations, driven by strong performances in services and manufacturing. However, he cautioned that the impact of higher National Insurance and global trade tensions has yet to surface in the data, warning that the real challenges are still to come.

Ben Jones, an economist at the Confederation of British Industry (CBI), said the unexpected growth in March was largely a rebound from February, but the strong GDP growth in the first quarter is likely a temporary phenomenon. He warned that with employment costs set to rise significantly following the autumn budget, UK businesses remain cautious about hiring and investment, and additionally, global economic uncertainty continues to threaten the UK's recovery.

Several economic research institutions have recently lowered their UK growth forecasts for 2025. Earlier this month, the Bank of England projected that the UK economy would grow by only 1 percent this year.

Given this backdrop, some UK research institutions have pointed out that maintaining and boosting economic growth will require stronger ties with the EU, positioning it as a key trading partner. The two sides scheduled a summit for May 19 to address several trade management issues, and institutions urged the UK government to take the opportunity to strengthen relations.

Noting that the ripple effects of U.S. tariffs are still reverberating through the global trade system and prompting responses from various countries, BCC Director General Shevaun Haviland said Britain and the EU must send a clear signal that open and fair trade is in both sides' best interests. She stressed that the upcoming summit must go beyond empty talk and clearly demonstrate a genuine commitment to improving trade relations.

Meanwhile, the upcoming industrial policies are also drawing attention. "The UK government is expected to release a series of notable policies in the coming weeks, including an industrial strategy and a ten-year infrastructure plan," said Anna Leach, chief economist at the Institute of Directors. "These could offer businesses a way out of the current difficulties and provide a clearer view of the UK's economic direction."