The UK economy turned a corner in Q1. Growth of 0.7% q/q was a marked step up from the 0.1% average in the second half of 2024 and the fastest rate since this time last year.

The obvious question is how much of this represents a genuine improvement in the economy and how much was due to firms bringing activity forward to avoid tariffs and taxes coming into force in April. The answer, as always, is a bit of both.

There were clearly some areas that benefitted from activity being moved forward. For example, manufacturing jumped to its highest level since mid-2023 after being in the doldrums for most of the last two years. What’s more, exports jumped by 3.5% q/q, suggesting some tariff front-running.

The biggest contributor to Q1 growth was a whopping 5.9% increase in business investment, which accounted for 0.6ppts of the 0.7% increase. Admittedly, most of this was driven by a 23% increase in transport equipment, which reflects the timing of aircraft delivery more than anything else. But this is extremely volatile (it was down by 19.6% in Q4 last year) and doesn’t tell us much about the state of the economy. More encouraging was the 8% increase in ICT and machinery expenditure, which is probably more reflective of genuine business investment in productive assets.

What’s more, there were some pockets of genuine strength and improvement in Q1. Retail sales volumes grew by 1.6% q/q, the fastest rate since late-2016. Consumer-facing services as a whole rose by 1.3%, which is reflective of strong wage growth finally feeding through into stronger spending.

There was also real strength in business-to-business sectors like IT and admin services, which are less likely to be influenced by the timing of tariffs. All told, the 0.7% headline growth figure overstates the strength of the economy in Q1, but there was a noticeable upturn in momentum even when we strip out those likely tariff and tax impacts. We estimate underlying growth in Q1 of 0.3%-0.4%.

Will this growth in the UK economy last?

The obvious counterpoint is that Q1 was a long time ago and we’re in a different world now. The combination of payback from activity brought forward, the imposition of tariffs, huge increases in uncertainty and financial market volatility and the increases in payroll taxes and inflation means Q2 is going to look much worse. Indeed, business and consumer confidence surveys slumped in April. A contraction is certainly not out of the question.

The economy will then be battling those same headwinds through the rest of the year, meaning growth is likely to be subdued. The upshot is we’re expecting growth of about 1% this year, but if some semblance of stability is restored in the second half of the year, then those underlying tailwinds of stronger consumer spending and business investment should mean better growth next year. We will set out our full view for the next year in our upcoming Quarterly Economic Outlook.

Inflation to jump on energy prices

We expect inflation to rise to 3.4% in April from 2.6% in March as Autumn Budget measures and regulated price hikes take effect.

The main source of upward pressure on the headline rate will come from energy prices. Household energy bills fell by 12% this time last year, but rose by over 6% this April. The national average 26% increase in water bills is also likely to add around 0.2ppts to the headline rate.

Meanwhile, services inflation will tick back up towards 5% from 4.7% in March. This is due not only to a range of regulated price hikes, but also the significant increase in employment costs that came into effect in April. Firms will want to try and pass that cost on to consumers where possible.

Looking further ahead we expect inflation to remain around 3.5% for the remainder of the year. While we don’t expect the coming rise in inflation to affect wage demands, pay growth is still elevated and inflation expectations have been rising. Clearly, there is a risk that workers try to protect their real incomes, which will prompt the Bank of England to continue to cut interest rates only gradually.

Retail sales to grow for sixth consecutive month?

Retail sales likely grew again in April following a strong first quarter where sales increased by 1.6% q/q. Warm weather and a late Easter probably boosted spending. We expect a 0.5% gain in April.

Yet there are at least three risks to our view.

First, April’s significant rise in household bills could weigh on spending.

Second, April is the month Donald Trump first announced tariffs on UK exports, which prompted a big drop in consumer confidence.

Third, consumers have been cautious regardless of the above. Spending has grown by far less than real incomes, while the household savings ratio (the proportion of available income not used for consumption) has boomed to around 12%. A further rise in savings due to tariff-related uncertainty could undermine our forecast.

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