The week ahead: sunny weather trumps Trump's tariffs

We now have the first batch of hard data in for April. It seems that UK consumers cared much more about good weather in the UK than they did about the start of a global trade war. Businesses were probably hit harder by the tariff uncertainty, but it now looks like the economy has held up reasonably well in the face of US tariffs and tax increases.

Early data largely positive for the UK economy

It really does seem that when the sun comes out, the UK starts spending. Retail sales grew by a solid 1.2% m/m in April, mainly driven by food sales as the BBQs came out. That marks the fourth consecutive month of growth for retail sales and the fastest growth since 2016. So, rather than consumers battening down the hatches in the face of surging tariff uncertainty, they opened their wallets up a bit more.

Consistent with stronger-than-expected growth in April, government borrowing also came in £3.5bn below the OBR forecast for the first time in over a year, partly because cash receipts came in higher than expected.

Admittedly, it wasn’t all good news. Inflation jumped from 2.6% in March to 3.5% in April, where it will probably stay for the rest of this year. However, even this is better than it looks. Almost all the rise was driven by one-off increases in regulated prices, tax rises and the late Easter.

There wasn’t much sign of firms passing on the big hike in employment costs from the higher minimum wage and jump in employers’ national insurance contributions. This is a good sign for the Bank of England, if not for firms’ profit margins.

We also got the first survey data for May, which suggests that consumer confidence and business sentiment rebounded this month after slumping in April.

Taking all this together, it seems that consumers shrugged off tariff and tax uncertainty in April. And even businesses seemed to regain some mojo in May.

UK economy faces headwinds but growth outlook remains steady

That doesn’t mean we’re out of the woods. Businesses were always likely to be hardest hit by tariff uncertainty and we don’t have any data yet on how that business-to-business activity has been disrupted. And even if the employment tax hikes haven’t so far really shown up in the inflation data, there is clear evidence that they have had a chilling effect on the labour market, which will weigh on the economy this year.

As a result, Q2 will be substantially weaker than Q1, but forecasts of a contraction in Q2 or even a renewed recession now look too pessimistic.

Looking ahead, the economy is now facing a plethora of headwinds that it wasn’t previously. Tariffs, uncertainty, tax hikes, lower employment and higher inflation will drag on growth over the rest of this year. But, the bigger picture is that the fundamental drivers of the UK economy are in better shape than widely acknowledged. Household real incomes have risen by more than 7% in the last two years. Consumers’ debt to incomes ratios are at the lowest levels since the 2000s and, despite the recent dip, employment is at a record high. In an economy that is reliant on consumer spending, those factors matter at least as much as trade uncertainty.

The upshot is that, despite all the headwinds now facing the economy, growth is likely to be similar to last year and will probably take a step up in 2026. We’ll be examining all these factors in more detail in our upcoming Quarterly Economic Outlook. 

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