Earlier this year Rachel Reeves was being written off for having jeopardised Britain’s economy. The chancellor’s tax-raising autumn budget had sapped business investment, spooked the financial markets and put the jobs market at risk.
The latest official figures showing stronger-than-expected economic growth of 0.5% in February will therefore come as a boost for the embattled chancellor, in a sign that the economy was in better health than her critics claimed.
The only problem is, to use a phrase Reeves has grown increasingly reliant on deploying, the world has changed.
After Donald Trump’s “liberation day” tariff announcement, mounting global uncertainty and escalating trade tensions will cast a long shadow over the UK’s economic prospects.
It is now likely the first quarter of the year – when British business leaders had claimed to be slashing jobs at among the sharpest rates since the 2008 financial crisis – will stand as the high point of 2025 for economic activity.
Nonetheless, the unexpected February reading for gross domestic product could bode well as evidence of Britain heading into the Trump-induced turmoil from a stronger starting point than first thought. Economists had forecast growth of only 0.1% in February, while January’s GDP snapshot was revised up from a 0.1% fall to zero.
February’s economic expansion was broad-based, including a 0.3% rise in services output, suggesting that consumers were ready to look through a gloomy backdrop and kept spending. Resilience in wage growth – which remains above inflation despite rising pressures on living costs – no doubt helped.
There was also little evidence that higher business taxes and weaker demand for goods from overseas were hitting manufacturing output, with a 1.5% monthly rise in industrial production. Construction rose by 0.4%.
However, some economists suggested that industrial companies could have been frontrunning the introduction of tariffs, similar to the increase in stockpiling before Brexit. It is also highly probable that Britain’s car industry and pharmaceuticals sector will take a hit from US tariffs over the coming months.
Despite this resilience, the outlook over the coming months is gloomy. British business leaders warn they are now facing a “double-edged sword” of rising domestic costs from tax rises announced by Reeves, as well as growing uncertainty over international trade.
While the government is trying to walk a fine line through the unfolding chaos, attempting to strike a trade deal with Washington while also rebuilding relations with the EU after Brexit, the UK stands to suffer from the general damage to the global economy. As a relatively small, open economy, where trade accounts for about 60% of GDP, Britain is exposed to declines in international trade, while the mounting geopolitical uncertainty will chill business investment.
Against this backdrop, the Bank of England is expected to cut interest rates next month, helping households and businesses with lower borrowing costs in a sign that, despite the recent resilience, the economy still needs support.
For the chancellor there will be a hope that the economy can continue to defy expectations. Stronger growth would be key for helping Reeves to avoid further tough decisions on tax and spending come her autumn budget, by giving her larger wriggle room in the public finances.
After a rocky start to the year, looking through the rear-view mirror to find that February was better than expected will come as some comfort for the chancellor. But the road ahead will be tougher.
