Economic update Q2 2025

The UK economic landscape has been dominated by tariffs since Donald Trump was inaugurated as US President at the end of January.

The impact of 10% tariffs is an additional challenge to the UK’s fiscal position as volatile gilt yields and slowing economic growth also put more pressure on the Chancellor’s efforts to balance the books.

The expected slowdown in GDP growth means the Bank of England will continue to cut base rates this year. We expect two more base rate cuts in 2025, but the chance of a third is rising.   

Key facts 

• Base rate cuts and loosening of mortgage lending stress test will underpin more activity in the UK residential sales market  
• Activity in the prime London sales and rental markets will maintain momentum this year, especially in the sub-£2m market 

• Activity in the rental market will remain strong, and constrained supply will underpin rental growth, albeit at a slower pace than recent years  

A better-than-expected 0.5% growth in GDP in February provided some good news for the UK Treasury, but this upturn in economic output is not expected to last. Higher National Insurance payments for employers, totalling around £25 billion, came into force in April, alongside rises in utility bills and council tax payments. In addition, companies exporting goods to the US are now paying 10% tariffs, with steel, aluminium and car exporters paying 25%. The UK economy has only expanded in four out of the last nine months, and economists are expecting modest economic growth for the rest of this year.  

The UK economy is also being affected by the global volatility created by the introduction of US tariffs. The erratic nature of the announcements created large movements in stock markets and spikes and troughs in gilt yields. When President Trump first announced his tariffs in early April, most stock markets around the world plunged. As the President started to row back on his announcements, introducing a 90-day ‘pause’ on higher tariffs, and making more conciliatory noises on China (even though tariffs remain in triple figures for most goods moving between the two countries) and then scrapping tariffs on iphones and components, stock markets have recovered to levels seen when Trump came to power in January, but they have not fully regained all losses sustained since late April.  

Inflation rates in the UK receded slightly in March, with the CPI measure falling to 3.4% from 3.5% in February. Higher household bills (including energy bills and council tax) which came into effect in April will likely push up inflation in the coming months, taking it further from the 2% target. Even so, rate-setters at the Bank of England are unlikely to be deterred from delivering a rate cut soon, as they will also be weighing up the outlook for economic growth, which has weakened substantially. We expect two further rate cuts this year, one in Spring and one later in the year, but the possibility of a third is rising. 

Swap rates, which determine mortgage rates, are also falling, with some lenders already reducing their pricing. This, coupled with a loosening of mortgage stress-testing requirements from major mortgage lenders including Santander, Halifax and HSBC, will help boost activity in the residential sales market during the rest of the year.  

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