After the barrage of taxes and tariffs introduced in April, the UK economy rebounded in June and is showing signs of recovery. This uplift was enough to lift growth in Q2 to 0.3%, which beat the Monetary Policy Committee’s (MPC) forecast and further reduces the chance of a rate cut in Q4. Looking ahead, growth will remain subdued as tariffs and payroll taxes will continue to weigh on growth for the rest of the year. Meanwhile, consumers remain cautious and further speculation about future tax rises in the Autumn could weigh on sentiment, even if much of the Chancellor’s plans are backloaded to the end of the decade. Overall, we continue to expect 1.2% growth in 2025.

Sectors hit hard by ‘awful April’ recovered in June

Starting with June in isolation, the economy rebounded 0.4% m/m as broad-based gains across the whole economy helped to support growth. Industrial production grew 0.7% m/m, close to our call for a 0.6% gain and well above the consensus estimate for 0.3%. This was driven by a 0.5% gain in manufacturing as activity recovered after a big fall in May.

On the services side, output grew 0.3% in June. This was driven by professional services where output jumped 1.7% and accounted for a huge 40% of the boost to June’s GDP. Add in a 0.3% gain in real estate activities and our view that the recovery in the housing market would boost growth in June proved correct. What’s more, the retail sector grew by 0.8%, as a rebound in motor trades supported growth. Given the big rises in Stamp Duty Land Tax (SDLT) and Vehicle Excise Duty (VED) in April, we think June’s figures show the economy starting to recover from ‘awful April’s’ tax rises.

Turning to the quarterly view, growth in Q2 came in at 0.3%. The economy proved more resilient than the MPC had anticipated with their forecast of just 0.1% growth in Q2. This was a sharp slowdown from 0.7% in Q1, but that was always likely as the economy battled multiple headwinds from tariffs and taxes.

Admittedly, the balance of growth doesn’t look as healthy as headline figures suggest. Consumer spending grew by just 0.1% as consumers continue to be cautious. Meanwhile, business investment fell by 4% as surging economic uncertainty prompted firms put the brakes on capital spending. That said, investment was always likely to be weak in Q2 as a 25% surge in transport equipment investment in Q1, which reflects the timing of aircraft arrivals, lifted investment and was always likely to unwind. Government spending grew 1.2% to offset this weakness as the big increase in spending from last year’s Autumn Budget starts to work its way through the economy.

Growth subdued in H2

On balance, we think the economy has started to recover from ‘awful April’. What’s more, the economy has averaged 1.2% y/y growth in H1 and is growing close to our estimate of potential growth of around 1.5% and has proven resilient to the shock of tariffs and taxes.

What’s more, strong growth in Q2 will support the hawk’s argument that interest rates are not weighing heavily on activity, another knock against a fourth interest rate cut at the end of the year. That said, we think the MPC will continue to judge underlying growth to be weak and instead choose to focus more heavily on whether the labour market recovers.

Looking ahead, the outlook remains subdued. Consumers remain reluctant to open their wallets, despite a healthy stock of savings and signs that consumers were gradually becoming more confident over the first half of the year. In addition, weaker global demand due to tariffs will continue to drag on exports. The speculation of further tax rises in the Autumn could also prompt consumers and businesses to delay big ticket items and capital outlays until the outlook is clearer.

Ultimately, we don’t expect growth to pick up much from here, growth was close to potential in the first half of the year and even outpaced both the US and Eurozone. Consumers continue to remain cautious and speculation around tax rises in the Autumn Budget is likely to weigh on sentiment. We continue to expect 1.2% growth this year.

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