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Britain's economic performance was better than expected in Q2 2025. Editorial credit: Tupungato, via Shutterstock.
The British economy expanded by 0.3% in the second quarter of 2025, comfortably exceeding the forecast 0.1% growth in output. That figure is well down on the 0.7% posted in the first three months of the year, but it was enough to take annual growth to 1.4%, the highest rate since February.
This unexpectedly strong showing was driven by a 0.4% bump to GDP in June. In another encouraging signal of strength, output across each of the services (0.3%), manufacturing (0.5%), and construction (0.7%) sectors expanded month-on-month.
Wednesday brought a continuation of the risk-on tone that has marked the week in financial markets. The pound climbed to its highest level against the US dollar since early July as expectations of a rate cut from the Federal Reserve gathered momentum. Sterling also strengthened against the euro and extended its rally in the wake of this morning’s GDP report.
The UK government is reportedly set to revive the Northern Powerhouse railway project after the summer break, according to media reports. While still unconfirmed, the project would place further strain on the creaking public finances. Quite what this means for the northern leg of HS2 is unclear, although there are hopes the government will resurrect the abandoned scheme at the same time.
According to government figures, Scotland’s net fiscal deficit (i.e. the gap between spending and revenue) is now just shy of 12% of GDP – more than twice that of the UK’s at large. Scotland’s devolved government confirmed the deficit had climbed by more than £5 billion to reach £26.1 billion this financial year.
European leaders held a “positive” call with Donald Trump yesterday ahead of his meeting with Vladimir Putin on Friday. In recent days, Europe has led a coordinated diplomatic push to ensure Ukraine’s interests are represented at the talks in Alaska. Leaders were reportedly reassured by Trump’s approach, although just what will transpire when the two meet face to face is a source of worry to many in the region.
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GBP: Pulled in both directions
Before this morning’s growth data crossed the ticker, sterling had been supported by signs that another wave of inflation was taking hold. Of course, the labour market is the other part of the Bank of England’s dual mandate, so you can expect some bumpiness for the pound as markets dissect the GDP report in its entirety.
GBP/USD: the past year
EUR: More focus on rates
It’s not just the pound that has benefitted from US dollar weakness. The euro reached a three-week high yesterday but continued to struggle against the pound. The giant chasm between the Bank and the European Central Bank’s policy rates seems to be making a difference at last.
GBP/EUR: the past year
USD: Overexcited. . . again
It’s unlike US dollar markets to take a data point and run with it. Please excuse our cynicism, but this is something we’ve seen on an almost weekly basis this year. Yes, headline inflation is largely under control. Yet core inflation rose again, and it is far from a sure thing that the cautious Fed will cut interest rates with the economic ground shifting beneath its feet.
EUR/USD: the past year
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