UK QUARTERLY ECONOMIC OUTLOOK | Q2 2025
A word from our economist
Q2 2025 Risks build, growth slows, but consumers resilient
To co-opt a phrase, 2025 is shaping up to be a year of four quarters. The imposition of huge US tariffs and the negative consequences for economies around the globe have dominated the commentary and the airwaves. However, for the UK economy, which is significantly services and consumer-spending led, domestic factors like income growth, consumer confidence and tax rises are more important – some of the factors reflected in The RSM UK Real Economy Economic Indicators.
Indeed, it was a partly a revival in consumer-facing services that boosted growth in Q1. Then, of course, the world changed in April, just as Q2 began. The economy is now facing a succession of headwinds that it didn’t have to contend with at the start of the year. Tariffs, more uncertainty, a slower-growing global economy, tax rises, a weakening labour and higher inflation will all drag on growth over the rest of the year, especially in Q2.
Given that list, it’s surprising we’re not suggesting an all-out recession is on the way. Tariffs by themselves will not have much of an impact on the UK. More importantly, the underlying drivers of the UK economy have started to pick up. Households’ real incomes have risen rapidly over the last two years and will continue to do so this year, despite higher inflation and a weaker labour market. Lower interest rates will be a help here. As the focus in the US moves from tariffs to tax cuts, global uncertainty should continue to diminish, allowing consumer confidence and business sentiment to continue to improve. Indeed, the strong performance of retail sales in April, along with recovering business and consumer sentiment in May, suggest that the hit to UK growth from tariffs will probably be smaller than we first feared.
If that all sounds a bit too optimistic, it’s really not. We expect inflation to hover around 3.5% for the rest of the year and growth to come in a little above 1%, almost exactly in line with last year. Hardly a barn-storming performance.
What’s more, the risks are arguably much bigger now. Anything from a resumption of the trade war – remember, most tariffs have been paused, not cancelled – to surging long-term gilt yields or another round of tax increases could all destabilise the economy again. However, for now at least, the evidence suggests that the economy has managed to weather the tariff tempest surprisingly well. Although 2025 will be far from a bumper year for growth, the risk of recession seems to have receded.
