Volkswacht Bodensee - UK economy grows above forecasts, but tariffs threaten progress

Gross domestic product rose 0.7 percent in the January-to-March period after only growing slightly in the final quarter of last year, the Office for National Statistics said in a statement.

It beats economists' expectations of a 0.6 percent increase.

The data comes as a boost for Prime Minister Keir Starmer and his Labour government, which struggled to kickstart stagnant growth since coming to power in July.

UK finance minister Rachel Reeves welcomed the news, saying the figures "show the strength and potential of the UK economy," while acknowledging that "there is more to do".

But analysts cautioned that the bumper growth may not be sustained.

Thursday's data covers the period before April's introduction of a hike to a business tax laid out in the Labour government's maiden budget in October.

It also precedes a baseline 10-percent tariff imposed on the UK and other countries by Trump last month.

"This might be as good as it gets for the year," said Capital Economics chief UK economist, Paul Dales.

- 'Short lived' -

The growth spurt is "set to be short lived as tariffs take effect” said Yael Selfin, chief economist at KPMG UK.

Despite the announcement of a UK-US trade agreement last week, "tariffs on UK exports to the US remain significantly higher than what they were prior to April," she said.

The US deal reduces tariffs on British cars and removes those on steel and aluminium, while in return Britain will open up markets to US beef and other farm products.

But the baseline 10-percent tariff remains intact.

In addition, Selfin said, "the indirect impact of trade tensions between the US and the EU will further constrain demand for UK exports".

ONS director of economic statistics Liz McKeown said that "the economy grew strongly in the first quarter of the year, largely driven by services, though production also grew significantly, after a period of decline."

Analysts attributed the rebound in production to manufacturers rushing to get ahead of the implementation of Trump's tariffs.

Separate trade data on Thursday showed that UK exports of goods to the United States increased for the fourth consecutive month in March.

"This pattern of increasing exports could be a sign of changing trader behaviour ahead of tariff introduction," the ONS said.

"Any residual support for manufacturing from front-running will fade from here on, pointing to activity remaining weak for the foreseeable future," cautioned economists at Pantheon Macroeconomics.

The ONS estimated that monthly GDP grew 0.2 percent in March, from an increase of 0.5 percent in February.

The data comes after the Bank of England last week cut its key interest rate by a quarter point to 4.25 percent as the threat of US tariffs starts to weigh on economic growth.

The BoE also upgraded its outlook for annual GDP for 2025 to one percent growth from 0.75 percent, but lowered next year's outlook to 1.25 percent from 1.5 percent.

Data on Tuesday showed that unemployment hit its highest level since 2021 in the first quarter.

G.Haefliger--VB