UK economy grows 0.3% in Q2

The UK economy expanded by a stronger-than-expected 0.3% in Q2 2025, surpassing the 0.1% consensus forecast and achieving a 1.2% year-on-year increase, largely driven by robust June performance across services, industrial output, and construction. This positive data, which saw sterling appreciate slightly, provides a boost for the government. However, the outlook for H2 2025 remains subdued due to global trade uncertainty and domestic labor market slowdowns, with the IMF projecting 1.2% growth for the full year.

Analysis

The United Kingdom's economy demonstrated unexpected resilience in the second quarter of 2025, with GDP expanding by 0.3%, significantly surpassing the consensus forecast of 0.1% from both economists and the Bank of England. This performance, following a strong 0.7% growth in Q1, was largely propelled by a robust 0.4% monthly expansion in June that reversed a 0.1% contraction in May. The growth was broad-based, with positive contributions from services, industrial output, and construction. On a year-over-year basis, Q2 output was up 1.2%, also beating the 1.0% forecast and prompting a modest appreciation in sterling against the dollar. Despite this near-term strength, the outlook for the second half of 2025 is characterized by caution. The primary headwinds identified are persistent global trade uncertainty, particularly from U.S. import tariffs, and a domestic slowdown in hiring pressures linked to higher employment taxes and a significant increase in the minimum wage. The IMF's forecast of 1.2% growth for the full year suggests a deceleration is anticipated, placing the UK's expected performance ahead of the Eurozone and Japan but behind the U.S. and Canada.

Key Decisions for Investors

• The stronger-than-expected GDP print provides short-term support for sterling, but investors should monitor if the subdued H2 outlook and identified headwinds begin to cap further currency appreciation.
• Given the resilient economic data, expectations for any near-term Bank of England rate cuts may be pushed back, potentially creating headwinds for UK gilts and rate-sensitive equities.
• Investors with exposure to UK domestic sectors should closely track upcoming labor market data and corporate margin pressures, as the impact of higher wages and taxes represents a key risk to earnings in the second half of the year.