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19 Aug 2025 | 3 minutes to read
The UK economy expanded by +0.3% over the second quarter of the year, according to figures from the Office for National Statistics (ONS). The latest GDP print represented a drop from growth of +0.7% recorded over Q1, but came in ahead of forecasts of only +0.1%. Month-on-month GDP rose +0.4% in June, up from a decline of -0.1% in May and also ahead of forecasts. First quarter GDP was very likely bolstered by activity brought forward as businesses sought to front-run tariffs and tax hikes. Therefore, the latest GDP print appears to demonstrate a level of economic resilience in the context of normalising activity post April. The ONS also revised up GDP figures for April, contributing to the better quarterly print. The outcome will have pleased Chancellor Rachel Reeves, who has set her stall out on fostering growth. Activity across manufacturing and construction rebounded in June, despite leading indicators like the respective Purchasing Managers’ Indices (PMI), pointing to further slowdown. The recent long spell of dry weather was cited as part of the reason behind rising activity in the construction sector, which expanded +1.2% over the three months to June. Output in the services sector also continued to rise at a healthy rate.
What this means for policymakers continues to divide opinion amongst market participants. A more resilient growth picture - together with inflation forecast to peak at 4% later this year - may mean the Bank of England (BoE) will be less inclined to cut interest rates further in 2025. The impact of greater government spending, set out at the last budget, could also begin to filter through into growth figures. Government spending grew by +1.2% over Q2. However, countering that is the likelihood that the drag on business investment from April’s tax hikes is yet to be fully felt. This could still stifle near-term economic activity, together with on-going speculation about further tax rises to come at the next budget.
The UK labour market continued to show signs of moderating according to the latest ONS figures. However, the slowdown was not as sharp as some economists had anticipated, with the unemployment rate remaining at 4.7%. The ONS suggested that the falling job vacancies were indicative of slower rates of hiring and firms not replacing workers that leave, rather than increased layoffs.
Overall employment increased by 238,000 over the quarter to June, which was some way ahead of consensus. Payrolled employment (which does not account for the self-employed) fell by c.8,000 month-to-month in July, while June’s reading was revised from a fall of 41,000 to one of 26,000. Wage growth remained steady at +5%, with public sector wage growth edging ahead of that in the private sector. While there are well known issues with the quality and reliability of the data – with the ONS themselves noting that payroll numbers should be treated with caution – the trend appears to be one of gradual easing in the labour market, with some past declines revised away. With wage growth remaining relatively strong, and positive in real terms, the data could dampen enthusiasm for further near-term monetary easing on the part of the BoE after last week’s narrowly supported interest rate cut.
The US Consumer Prices Index (CPI) crept higher in July, with headline CPI up +2.7% year-on-year in July, just shy of the +2.8% forecast. Core CPI – which strips out more volatile energy and food – ticked up +3.1% annually, the highest since February and a touch above +3.0% forecasts. In a separate data report, the biggest surprise came from the Producer Prices Index (PPI) print, with wholesale output costs surging +0.9% month-on-month – far ahead of the +0.2% forecast. On an annual basis the print was up +3.3% versus forecasts of +2.5%. This indicates rising production and supply-chain cost pressures, which could soon filter through into consumer prices. While some of the upward pressure on prices likely stems from trade tariffs, the detail behind both prints suggested that recent pressures stem from sources which are not directly impacted by them. For the Federal Reserve (Fed), this creates a policy dilemma ahead of its 17 September meeting. Markets still expect a 0.25% interest rate cut – with recent indications of material labour market weakness perhaps foremost in policymakers minds – but last week’s inflation data could give pause for thought.
Elsewhere, the latest monthly University of Michigan US consumer sentiment survey fell to a three-month low. The drop in sentiment possibly reflects a softer labour market and nervousness around rising inflation. While sentiment remains subdued, it does not yet appear to have affected US retail spending, with retail sales rising solidly month-on-month in July (up +0.5%), alongside upward revisions to May and June. The figures point to resilient consumer spending despite the tariff backdrop, with notable strength in sales of goods recently hit by tariff-driven price pressures like motor vehicles.
Just hours before the previously agreed trade truce was due to expire at the beginning of last week, the US and China agreed to an additional 90-day extension. The news will have been a welcome relief for many businesses, with the extension removing the looming threat of an effective trade embargo should triple-digit tariffs return. Officials from both countries will resume negotiations in the hope that an agreement can be reached before mid-November, when the latest extension will end.
Separately, China’s latest retail sales and fixed asset investment data suggested further weakness for both consumption and investment. Retail sales grew by +3.7% on a year-over-year basis, below expectations of a +4.6% rise. While Fixed Asset Investment rose less than expected, +1.6% versus +2.7%, year-over-year. In a bid to boost activity, the Chinese government unveiled details of an interest subsidy plan on loans for households and service sector businesses. The move is likely also a response to prior soft borrowing data and underscores a renewed commitment for consumption support on the part of Chinese policymakers.
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