For the data behind the commentary, download the full May 2025 UK Economy & Housing Report.
Bumper growth, interest rate cuts and trade deals
They say that after the rain, comes the sun. And so, after the widespread tariff imposition, comes the trade deals.
In early May, the UK signed a trade agreement with both India and the US; and the US agreed more favourable terms with China. While the UK trade agreements won’t move the needle in their own right, they are better than the alternative, and will likely have a positive impact on the outlook for economic growth. Nevertheless, these agreements are by and large (with the exception of the UK-India deal which has been in discussion since 2022, but was most likely expedited recently) just a walk back on the measures taken a month previous.
The other good news for investors is the MPC voting to cut the base rate by 25bps to 4.25%. The MPC minutes suggest a relative bullishness on the economy, and an easing of inflation. However, in truth, there are still plenty of ‘unknowns’, particularly as a result of the outlook for tariffs.
While we have seen some improvements in the outlook for trade, as the end of the 90 day window of the ‘pause’ in reciprocal’ trade comes closer, we will hopefully get some further clarity as to future trade barriers. This will in turn give greater clarity to the MPC (and of course, ourselves) on the outlook for inflationary pressures, and help set the tone for further cuts during the rest of the year. In the meantime, consumer and business confidence is flagging as a result of the economic uncertainty of the last month or so – even if we have started to see markets rebound.
Focusing on the tangible, the easing of wage growth inflation is a step in the right direction, but remains high compared to historical standards, highlighting the difficult task the MPC has, as to next steps. In what is good news for the economy (but may not be for interest rate cuts), is the fact that GDP grew by 0.2% in March, taking Q1 growth to 0.7%
