Barclays Bank has revised its forecast for UK GDP growth for the first quarter of 2025. The bank raised the estimate from 0.2% to 0.7% quarter-on-quarter, following positive data in February. February’s data showed a 0.5% monthly growth, reinforcing optimism about improving economic performance. This growth was attributed to a rise in exports to the United States, driven by concerns about looming tariffs.
On the other hand, the bank maintained its estimates for post-Q1 economic activity unchanged. This is due to the impact of tariffs expected to be implemented in the second quarter of this year.
Strong Performance in the Services, Manufacturing, and Construction Sectors
The detailed GDP report revealed broad-based growth across various economic sectors. The services, manufacturing, and construction sectors contributed significantly to driving UK economic growth. UK goods exports to the United States rose by £0.5 billion in February. This is attributed to companies rushing to export early in anticipation of anticipated changes in trade policy. However, Barclays Bank believes this export activity remains temporary and does not reflect long-term demand. The bank expects export momentum to decline in the coming months when the tariffs officially come into effect.
Labor Market Shows Signs of Weakness
Despite the growth, the bank noted a deterioration in UK labor market indicators during the first quarter. Redundancy notices increased, while permanent job openings contracted, raising some economic concerns. The unemployment rate is estimated to have fallen to 4.3% in February, a slight decline compared to the previous month. However, this decline does not represent a real improvement in employment, but rather reflects stagnant market dynamics.
An Expected Slowdown in Wage Growth
Barclays expects private sector wage growth to slow in the coming months. The bank indicated that wage growth could fall to 5.9% year-on-year. This slowdown is likely to reduce household purchasing power, especially as prices remain high. This could also increase pressure on consumers and limit domestic consumer spending.
Inflation in Focus
Barclays believes that inflation remains a challenge, despite recent signs of decline. The bank expects headline consumer price inflation to fall to 2.7% in March, compared to 2.8% in February. This decline is attributed to a slight slowdown in commodity inflation, along with a decline in services inflation. However, the pace of decline remains slow, which may prompt the Bank of England to delay interest rate cuts.
Bank of England Policy Outlook
The Bank of England’s Monetary Policy Committee is expected to discuss the impact of tariffs at its next meeting. Barclays believes that the impact of tariffs will be contractionary in net effect, potentially reducing inflationary pressures. However, the committee refrained from providing clear statements about the nature of this impact on inflation. This ambiguity is interpreted as evidence of continued caution in making influential monetary decisions.
A Balance of Optimism and Caution
Barclays’ update displays a mixture of confidence and concern. On the one hand, strong February data supported the upward revision of growth forecasts.
However, on the other hand, risk factors remain, particularly on the trade and employment fronts. The increase in exports is a temporary positive factor, not reliable for the future. This is because the increase was driven by concerns about upcoming US tariffs.
At the same time, the labor market showed clear signs of slowing. Layoffs increased, while job creation declined significantly. In addition, slowing wage growth is negatively impacting domestic spending and consumer confidence.
A Mixed Economic Picture at the Start of 2025
The start of 2025 shows a mix of economic progress and pressure. Despite rapid growth in the first quarter, challenges loom.
Barclays Bank sees inflation on a slow but manageable downward trend. The Monetary Policy Committee (MPC) is expected to respond to developments with extreme caution and measured decisions. However, trade uncertainties and a potential labor market downturn are placing additional pressure on the economy. The overall outlook remains balanced between cautious optimism and legitimate concern.
On the other hand, the expected slowdown in prices reflects an opportunity to achieve a better balance. The MPC could use this margin to carefully adjust interest rates. As inflation indicators stabilize, investment sentiment may improve if trade tensions ease. However, it is too early to predict a complete reversal in the economic trend until US policy becomes clearer.
Business and consumer confidence are expected to be impacted by global trade volatility. Although inflation is relatively stable, pressure remains due to the impact of upcoming tariffs. A weak labor market, coupled with slowing wage growth, could dampen domestic spending. The Bank of England will face a challenge in adjusting monetary policy without negatively impacting growth.
Key Indicators:
- GDP: Growth of 0.7% in the first quarter of 2025.
- Exports: Temporarily rose due to expectations of US tariffs.
- Labor Market: Data showed a decline in employment and an increase in redundancy notices.
- Wage growth: Expected to decline to 5.9% annually in the private sector.
- Inflation: Decreased slightly to 2.7% in March.
- Monetary Policy: Expected to be a contractionary assessment of the impact of tariffs in the short term. Economic indicators reflect uncertainty that warrants close monitoring. The Bank of England’s response and external factors remain crucial factors for the UK’s future growth trajectory.
