Holger Schmieding: Stagnation in UK Business Investment is Over

Holger Schmieding, Chief Economist at Berenberg, discusses UK-EU trade relations and the divergence of post-Soviet liberalism, right-wing authoritarianism and their effect on European economies. It comes as European stocks are expected to outperform US stocks, driven by structural shifts such as higher investments in defense and infrastructure. He speaks with Bloomberg's Paul Sweeney and Tom Keene.

The UK economy enjoyed its strongest quarterly growth in a year before the double blow of tax hikes and Donald Trump’s trade war.

Gross domestic product rose 0.7% in the first quarter, an acceleration from the 0.1% increase at the end of 2024, the Office for National Statistics said Thursday. It was above the 0.6% expected by the Bank of England and private-sector economists.

Output in March alone grew by 0.2%, instead of stagnating as economists had forecast. It suggests businesses and consumers were holding up a month before a huge tax hike hit employers and Trump was due to announce sweeping global tariffs. Services and construction both grew strongly, offsetting a sharp fall in manufacturing.

The pound gained after the stronger-than-expected data, up 0.2% to $1.3289. Money markets trimmed bets on Bank of England interest-rate cuts slightly, pricing in 40 basis points more easing by the end of the year, which means one quarter-point cut is fully priced with around 60% chance of another.

The pickup is a boost for Keir Starmer’s Labour government, which has struggled to get the economy motoring since winning power last summer. GDP per head — a key measure of living standards — expanded 0.5% in the first three months of 2025, bouncing back after two consecutive quarterly falls.

However, economists are urging caution. The first quarter was aided by strong growth in February as factories ramped up production in an attempt get ahead of Trump’s highly anticipated tariffs by increasing exports to the US.

Separate trade figures on Thursday showed exports to the US in the first quarter were the highest since the end of 2022 after a fourth consecutive monthly increase. Car manufacturers ramped up exports to the US in March, driving an increase in shipments of transport and machinery equipment.

Moreover, the levies subsequently announced on April 2 were far worse than expected, and the blow to confidence is expected to keep weighing on the economy despite Britain and the US agreeing a deal on tariffs and a truce in the trade war between Washington and Beijing. PMI surveys show the private sector shrinking in April.

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