The UK economy expanded by a robust 0.6% in the first quarter of 2025, beating the 0.4% consensus, but the headline figure fails to capture mounting headwinds from a slowing March and the escalating Iran conflict. While Q1 was driven by a rebound in consumer spending and a resilient services sector, business surveys and geopolitical shocks suggest the recovery is losing steam.
Official data showed the services sector—roughly 80% of GDP—led gains alongside modest manufacturing growth. However, March’s high-frequency indicators revealed a sharp cooling. The S&P Global UK Services PMI slipped to 51.2 from 53.5, retail sales fell 0.3% month-on-month, and consumer confidence dipped. Economists now project Q2 growth could fall to just 0.1% or even contract.
The Iran conflict, which intensified in late March, has injected new risks. Oil prices surged above $95 per barrel, raising input costs and squeezing household budgets. Supply chain disruptions through the Strait of Hormuz are affecting delivery times and raw material availability. Consumer confidence, measured by GfK, dropped sharply in April.
Inflation pressures are complicating the Bank of England’s stance. After trending toward the 2% target, renewed energy costs may delay rate cuts. Markets have scaled back expectations for easing in the second half of 2025, and the central bank is expected to hold rates at 5.25% at its upcoming meeting. For businesses and households, the outlook has darkened. Input cost inflation is accelerating, real incomes remain below pre-pandemic levels, and uncertainty is delaying investment. Small and medium-sized enterprises face heightened vulnerability.
The Q1 print offers a backward-looking snapshot; the full economic toll of the Iran conflict is yet to be felt. With risks tilted to the downside, the UK economy stands at a crossroads, testing its resilience in the quarters ahead.
