Rachel Reeves has gained only a temporary reprieve from upbeat first-quarter UK GDP data, economists warned on Thursday, as the global trade war adds to the budgetary pressure facing the chancellor this autumn.
A 0.7 per cent surge in GDP in the first three months of this year beat analyst expectations and provided a fillip to the government, given the thin margin of fiscal headroom created in the Spring Statement in March.
Reeves, who has repeatedly described growth as her “number one mission”, said the economy was “beginning to turn a corner”.
But analysts still fear the chancellor will need to set out further tax rises or spending cuts in the autumn Budget, because of persistent overshoots in government borrowing figures and mounting threats to the global economy from US President Donald Trump’s trade war.
Public borrowing figures have exceeded economists’ forecasts in every month of the current fiscal year bar April 2024, according to Financial Times analysis of Reuters data.
“I suspect that the government will still have to take some action to stay within the fiscal rules in the autumn,” said Andrew Wishart, economist at Berenberg bank, referring to Reeves’ self-imposed rule that day-to-day spending must be covered by revenues by 2029-30.
Faced with backbench pressure over steep welfare cuts and curbs on winter fuel payments, ministers have been pinning their hopes on firmer growth figures to ease pressure on the public finances ahead of the autumn.
As such, Thursday’s figures came as a big relief to Downing Street: Prime Minister Sir Keir Starmer hailed the “very welcome” GDP data.
A surge in volatile business investment, which rose 5.9 per cent, the fastest pace in two years, helped propel growth higher than in France, Germany, Canada and the US.
First-quarter GDP far outpaced the 0.2 per cent growth estimate from the Office for Budget Responsibility, the fiscal watchdog.
But Wishart warned that official figures already showed the rebound from the 0.1 per cent expansion in the final quarter of 2024 had failed to translate into strong tax revenues, leaving the public finances in a weak state.
Government borrowing exceeded the official forecast by £15bn in the fiscal year 2024-25, implying that economic activity has become less tax-rich.
The government is facing the prospect that the OBR will further downgrade its fiscal forecasts later this year after higher borrowing costs contributed to an overshoot in its March outlook.
Vítor Gaspar, a senior IMF official, told the Financial Times in April that while Britain had made “sizeable efforts” to curb its deficit, there may still be a need for “contingency measures” to raise revenue or curb spending if the economy was hit by fresh shocks.
Detailed figures for the first three months of this year suggest temporary factors may have played an important role in buoying growth.
Net trade contributed 0.4 percentage points to growth, helped by export volumes rising sharply after three consecutive declines and suggesting companies brought activity forward ahead of higher US tariffs.
UK exports to the US of non-ferrous metals, which include aluminium, copper and lead, rose by an annual rate of more than 700 per cent in the first quarter, according to Office for National Statistics data.
Paul Dales, economist at research company Capital Economics, said there were signs that activity had been “pulled forward” into the first quarter as businesses responded to the prospect of higher trade barriers.
The GDP figures indicated that “the best part of the year may already be behind us”, he added.
Manufacturing was up by 0.8 per cent in the first three months of the year, driven by growth of 2.7 per cent in transport equipment, the major export to the US.
Kallum Pickering, chief economist at investment bank Peel Hunt, said this would probably “unwind in the second quarter — showing up as a drag from net trade”.
At home, higher wages and national insurance contributions have left businesses facing steeper payroll costs since last month.
Economists polled by Reuters expect growth to slow to 0.2 per cent in the second quarter and remain at that pace for the rest of the year. This month, the Bank of England forecast an expansion of just 0.1 per cent in the second quarter.
James Smith, economist at ING bank, warned of a “basic problem”: that every year since 2022, GDP growth has been stronger through the first half of the year, particularly in the first three months, than in the second.
GDP data was supposed to be adjusted for seasonal patterns, but “extreme volatility” during the pandemic had made that task harder, he added.
The OBR’s March forecast was already more optimistic than those of many other commentators, predicting GDP growth would accelerate from 1 per cent this year to 1.9 per cent in 2026. By contrast, the BoE expects a pick-up from 1 per cent this year to just 1.25 per cent next year.
Analysts are also awaiting the possibility that the OBR downgrades its forecasts for UK productivity growth, which for several years have been notably more optimistic than other estimates. That would deal a further blow to the public finances.
Separate official figures showed productivity growth remained historically weak. Growth in output per hour worked was up just 1.1 per cent in the first three months of this year compared with the final quarter of 2019, before the pandemic.
That said, if the recent improvement in output proved resilient despite global trade tensions, the fiscal arithmetic would eventually benefit, said Neville Hill of consultancy Hybrid Economics.
Parts of the economy showed signs of strength in the first quarter, with 0.9 per cent growth in the output of consumer services, such as bars and restaurants, and 0.4 per cent growth in domestic household consumption.
Strong wage growth and four interest rate cuts since last summer have boosted consumer finances.
GDP per capita, which determines the pace of living standards, returned to growth. It rose by 0.5 per cent following contractions in the previous two quarters, but was still 0.4 per cent below its Q4 2019 level.
If the boost to business investment was not revised away, this could add to UK growth potential and “mark a win” for Reeves as the big fiscal event of 2025 approaches, said Ellie Henderson, economist at Investec.
“It is certainly encouraging that the UK has got off to a good start to the year,” she said, but “we wouldn’t say that it makes the job all that much easier for the chancellor come autumn.”
