Economy was picking up speed, but tariffs mean it won’t last long

The economy came back with a bang in February, growing 0.5% month on month (m/m). It puts the economy on track to grow by 0.5% in the first quarter after January’s data was revised upwards to flat from -0.1%. 

However, February feels like an age away now. Last week’s tariff announcements, and then postponements, have meant uncertainty has surged. This will work against some of the positive gains being made by consumers, who looked to have started spending again.

While we don’t think tariffs will tip the UK into another recession, there will be a headwind to growth that may result in a sharp slowdown again later in the year. 

What’s driving growth? 

Growth in February was broad-based, with construction, production, total services and consumer-facing services all rising. 

Consumer-facing services rose 0.7% on the month, outpacing services, which rose 0.3%. They were boosted by large bounces in wholesale and retail (+3%), as well as food and beverage services (+2.1%). This suggests the growth in household incomes is finally starting to feed through into higher spending.

The 0.4% expansion in the construction sector was largely driven by public sector projects. ‘Public other new work’ grew 11.4%, which captures non-housing-related building by the state. It means elements of Rachel Reeves’s higher investment spending are starting to filter through into the economy, which should provide a tailwind to growth. However, it’s unlikely to be enough to offset the potential impact of tariffs and the related hit to both business and consumer confidence. 

Production output grew by a whopping 1.5% on the month on the back of a 2.2% increase in manufacturing. Growth in manufacturing was also broad-based, but computer electronics, pharmaceuticals and transport equipment all saw robust growth. It suggests international businesses and consumers brought forward purchases in February to avoid tariffs. Indeed, February’s trade data indicates exports to the US were the highest since November 2022. 

Trade uncertainty to slow progress

The big question going forward is how will tariff developments impact the positive momentum the economy has built recently?

The direct impact from tariffs on UK exports should be small because most of our trade is in services. However, the huge rise in uncertainty will dent consumer and business confidence. Consumers will be cautious about spending their increases in income, which will damage the recent uptick in consumption. 

Likewise, business investment is likely to suffer. The current 90-day pause on most tariffs won’t provide the stability businesses need. The manufacturing sector will be particularly hard hit by this pervasive uncertainty as tariffs will weigh especially hard on trade in goods. 

Ultimately, the outlook has materially worsened. It means this newfound momentum shouldn’t cause the Bank of England to hesitate on cutting interest rates next month. We expect growth to start to slow from here on out.