UK GDP Beats Forecasts, But BoE May Hold Fire Amid Growth Skepticism; GBPUSD Climbs

UK GDP Accelerates in Q1 2025: How Will the BoE Respond?

A stronger-than-expected GDP print for Q1 2025 briefly dampened BoE rate cut hopes before expert warnings tempered market enthusiasm.

The economy expanded by 0.7% quarter-on-quarter in March, accelerating from 0.1% growth in Q4 2024. Meanwhile, the economy grew by 1.3% year-on-year in Q1 2025, compared with 1.5% in Q4 2024. Economists had expected 0.6% growth in Q1 and a 1.2% annual increase.

Key data from the Office for National Statistics included:

• Services sector output rose by 0.7% quarter-on-quarter, the largest contributor to overall output growth. Output increased 0.1% in Q4 2024.
• Production increased by 1.1%, snapping a three-quarter losing streak. Manufacturing production rose 0.8% after falling 0.6% in the previous quarter.
• Household consumption increased 0.2% in Q1 2025, boosted by higher spending on goods, services, and housing-related categories.

Overall, the data pointed to a resilient economy, with services and production providing upward momentum.

 

Expert Views on the UK Economy

Despite the upbeat report, economists urged caution. Senior Strategist Mr. M Brown at Pepperstone downplayed the better-than-expected figures, stating:

“The above figures flatter the actual state of the economy, given the huge positive skew in the data from a significant amount of front-running. This takes the form of both a rush of exports ahead of the US’ tariff imposition at the beginning of last month, as well as activity having been pulled forward ahead of the impacts of the National Insurance hike, and minimum wage increase, from the start of the new tax year.”

Brown concluded:

“Consequently, there is little point in placing much weight on the Q1 GDP data, particularly with economic momentum having waned considerably over the last six weeks or so, and with risks to the outlook continuing to tilt firmly to the downside. April’s PMI surveys help to prove this point, with the composite output metric having slumped to a 29-month low, well into contractionary territory.”

Bank of England Monetary Policy Outlook

The GDP report followed UK labor market data for March 2025, which prompted fresh speculation on BoE policy. BoE Monetary Policy Committee Member Catherine Mann remarked on the UK labor market, reportedly stating:

“The first observation is that the labour market has been more resilient. Now, yes, we’ve had some prints that are indicative of a slowing labour market, but it is not a non-linear adjustment.”

Despite a rise in employment, the unemployment rate ticked higher, likely due to an expanding labor force. Meanwhile, average earnings incl. Bonus rose 5.5% in Q1 2025 compared with Q1 2024, down from 5.7% in Q4 2025. Resilient wage growth may support consumer spending and inflation, supporting a less dovish BoE stance.

On May 14, BoE Chief Economist Huw Pill warned rates may need to stay higher to tame inflation, testing bets on near-term BoE rate cuts.

GBP/USD Reaction to March’s GDP Report

Before the UK GDP Report, the GBP/USD fell to a low of $1.32485 before climbing to a high of $1.32864.

However, in response to the report, the GBP/USD fell to a low of $1.32692 before rising to a high of $1.32855. The GDP numbers may prompt the BoE to maintain its current stance, awaiting Q2 data to reassess the economic outlook.

On Thursday, May 15, the GBP/USD was up 0.23% to $1.32834.

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