Angle: Better-than-expected growth with services and construction up—even as production slips. What that mix means for sterling and the Bank of England’s sequencing.
The print: a sturdier quarter than feared
The UK economy grew 0.3% quarter-on-quarter in Q2 2025 and 1.2% year-on-year, a touch stronger than most forecasters—and the Bank of England—had pencilled in. June alone rose 0.4% month-on-month, offsetting May’s dip and confirming that activity carried some momentum into summer. In output terms, services expanded 0.4%, construction rose 1.2%, while production fell 0.3%. The Office for National Statistics (ONS) also flagged that some demand had been pulled forward into late Q1—ahead of April stamp-duty changes and after U.S. tariff announcements—creating a tricky base for interpretation. (Office for National Statistics)
Two details inside the ONS tables help explain the composition:
- Household consumption eked out +0.1% q/q, with better showings in transport, clothing/footwear, housing and “miscellaneous” services; excluding the drag from net tourism, domestic consumption rose 0.5%. (Office for National Statistics)
- Business investment slipped 4.0% q/q after a strong Q1, with transport equipment and other machinery/structures notable drags—an early sign that higher funding costs and uncertainty are still inhibiting capex. (Office for National Statistics)
On the supply side, information & communication led services, boosted by computer programming and consultancy; manufacturing eked out +0.3% q/q, but the broader production sector was pulled lower by a sharp fall in utilities output. Construction’s strength was broad-based, led by infrastructure new work and private-housing repair and maintenance. (Office for National Statistics)
The beat vs expectations: a test for BoE sequencing
The outturn landed above the 0.1% q/q pace many private forecasters—and the BoE—expected for Q2. Markets read it as modestly sterling-supportive: the pound ticked higher after the release. (Bloomberg.com, Reuters)
The policy context matters. Just a week earlier (7 Aug) the MPC cut Bank Rate 25 bps to 4.0% by a razor-thin 5–4 vote, with four members preferring no change and one favoring a larger 50 bps cut. That split already nudged gilts to price a more cautious easing path. A firmer GDP print now complicates the “steady-as-she-goes” dovish case into autumn. (Bank of England, Reuters)
Drivers & drags: what’s really moving the dial
1) Timing effects & inventories. The ONS notes that some activity was brought forward into February–March—partly linked to stamp-duty timing and U.S. tariff-related behavior. That front-loading can leave a softer echo in Q2 components (notably private investment) even if headline GDP holds up. Inventories added less to growth than in Q1, consistent with firms paring precautionary stockpiles. (Office for National Statistics)
2) Consumption resilience—but not exuberance. Real household spending’s +0.1% q/q is consistent with real-income normalization but also with a consumer who is choosy. Excluding the tourism balance, domestic demand looks firmer (+0.5%), but households remain sensitive to price levels—especially in services. (Office for National Statistics)
3) Investment wobble. The –4.0% q/q drop in business investment reverses part of Q1’s jump. Given higher effective borrowing costs and tighter credit standards for small/mid corporates, it’s not surprising that firms are deferring larger projects and favoring maintenance capex. (The ONS attributes much of the Q2 investment softness to transport and other machinery/structures.) (Office for National Statistics)
4) Sectoral mix. Services is still the growth engine, but Q2’s 1.2% construction bounce stands out—helped by infrastructure and housing R&M. Production’s −0.3% largely reflects utilities volatility; manufacturing, in contrast, managed +0.3% with pharma and machinery positive. (Office for National Statistics)
Market reaction: sterling firmer; gilts weigh the path ahead
FX. The GDP beat saw sterling edge up versus the dollar and euro, consistent with a modest paring of near-term rate-cut odds. That fits the narrative that the UK expansion—while not booming—has avoided stalling despite tariffs and a softer job market. (Reuters)
Rates. Gilt pricing into the BoE meeting had already turned cautious after the knife-edge 5–4 vote; front-end yields pushed higher in the aftermath as traders reassessed the pace of further easing. Today’s stronger GDP doesn’t overturn the disinflation trend, but it reduces urgency—especially if services inflation stays sticky. (Reuters)
Policy read-through: the BoE’s trade-offs just got harder
What the BoE said last week. The August Monetary Policy Summary framed policy as a “gradual and careful” withdrawal of restraint, contingent on underlying disinflation continuing. The Committee explicitly flagged that services inflation had been broadly flat in recent months, wage growth was elevated but easing, and future moves would not be on a preset path. The vote split—four for hold, four for –25 bps, one for –50 bps—captures the range of views. (Bank of England)
What would open the door to more easing? Three signposts matter:
- Services CPI cooling decisively from around 4.7% y/y (June) toward levels consistent with the 2% target. With services prices closely linked to domestic costs and wages, this is the stickiest piece of inflation. (Office for National Statistics)
- Wage growth (regular pay) easing from roughly 5% y/y into the 3%-handle, the realm the MPC often associates with 2% inflation consistency. Recent data are moving in the right direction but not fast enough for the hawks. (Reuters)
- Activity data that show slower demand: if PMIs and monthly GDP roll over from July’s levels, the “growth risk” argument for further cuts strengthens.
With Q2 GDP beating expectations, the burden of proof for another near-term cut shifts back to prices and pay rather than output alone.
What this means for sterling—and for the sequencing of cuts
- For sterling: A modest GDP beat alongside still-elevated services inflation is typically FX-supportive at the margin, because it nudges rate-differential expectations less dovishly. That said, the currency will remain sensitive to U.S. rate moves and global risk tone (and, in 2025, tariff headlines). (Reuters)
- For gilts: After a divided cut, the bar for another one at the very next meeting is high. Traders will scrutinize services CPI and pay more than the growth print. Unless inflation data cooperate, the pace of easing may be slower than markets assumed in July. (Bank of England)
The bigger picture: how durable is this growth?
The ONS hints that part of Q1’s strength reflected front-loaded activity (avoiding tariffs; stamp-duty timing). Q2 shows the comedown was limited—but the internals reveal fragile investment and only modest real consumption. That aligns with survey signals: July PMIs pointed to slower services momentum even as manufacturing stabilized, a mix that seldom generates runaway growth. (pmi.spglobal.com)
Meanwhile, the labour market is softening at the margin—vacancies drifting down, employment growth slower—yet pay growth remains around 5% YoY, uncomfortably high for a clean glide-path back to 2% inflation. This split—cooler jobs quantities, sticky pay—is exactly the BoE’s dilemma. (Reuters)
What’s next: data points that will set the tone
- Monthly GDP (July) and PMIs (August): confirm whether the late-Q2 impetus persisted or faded. S&P Global’s July survey already flagged a cooling in services demand; August will show whether that was a blip. (pmi.spglobal.com)
- Labour market & wages: watch regular pay and employment trends; a clear downshift in wage growth would give the MPC more latitude. (Office for National Statistics)
- Inflation prints: especially services CPI. A break below the mid-4s would be the cleanest signal that underlying pressure is easing towards target-consistent territory. (Office for National Statistics)
- Investment revisions: provisional capex estimates often move; if Q2’s –4% is revised milder, it would soften the “investment slump” narrative, but the direction of travel still looks cautious for now. (Office for National Statistics)
The bottom line
Q2’s 0.3% growth tells a nuanced story: services and construction kept the expansion intact; production lagged; consumption is resilient but hardly roaring; and business investment took a step back. The surprise versus expectations gave sterling a gentle lift, but it complicates the case for rapid rate cuts after the BoE’s knife-edge August decision. From here, the easing timetable depends less on GDP and more on the stickiest parts of inflation—services prices and wages. Until those relent decisively, the Bank is likely to move cautiously, keeping a gradual, data-dependent stance.
Sources
- ONS, GDP first quarterly estimate, Q2 2025 (headline +0.3% q/q; services +0.4%, construction +1.2%, production −0.3%; June +0.4% m/m; timing effects from stamp duty and U.S. tariffs; expenditure detail incl. consumption +0.1% q/q; business investment −4.0% q/q). (Office for National Statistics)
- Reuters/Bloomberg, market reaction & expectations beat (sterling ticked higher; BoE/consensus had 0.1% q/q). (Reuters, Bloomberg.com)
- BoE Monetary Policy Summary, Aug 2025 (Bank Rate cut to 4.0% on 5–4 vote; focus on underlying disinflation; services inflation noted as broadly flat; data-dependence). (Bank of England)
- Reuters, gilts after BoE vote (yields firmer; easing path reassessed). (Reuters)
- S&P Global PMI, July 2025 (services momentum cooled). (pmi.spglobal.com)
- UK inflation & wages snapshots (services CPI ~4.7% in June; regular pay ~5% y/y in the three months to June). (Office for National Statistics, Reuters)
Educational disclosure
The information above is for general informational and educational purposes only and does not constitute investment, financial, legal, or tax advice. Markets and policies evolve quickly; please verify key facts and figures directly from the cited primary sources (ONS releases, Bank of England publications, and reputable newswires) before relying on them. We do not recommend buying, selling, or using any specific security, instrument, or strategy. If you need advice tailored to your situation, consult a licensed professional in your jurisdiction.