UK sees strong GDP growth at the start of the year

Data published this month by the Office for National Statistics (ONS) showed that the UK economy grew strongly in the first quarter of 2025. Output increased by 0.7% in Q1 2025 after growing by 0.1% in Q4 2024 (Figure 1). This rate of growth was slightly higher than the average expected from surveyed analysts.

Figure 1: UK real quarterly GDP growth, Q1 2023 to Q1 2025

Source: ONS

The ONS observes that the services sector, an important sector for London, grew by 0.7% in the quarter, while the production sector grew by 1.1%. However, the construction sector saw no growth. Real GDP per head also saw growth on the quarter of 0.5%. This follows on from two quarterly falls.

Bank of England cuts interest rates again

The Monetary Policy Committee (MPC) of the Bank of England voted to lower interest rates by a quarter of a point to 4.25% in May. This is the fourth cut in rates since the Bank started lowering rates from their recent high of 5.25%. However, the MPC insisted that it would retain “a gradual and careful approach” which has lowered expectations of the number of future cuts to come this year. The MPC vote was however divided on their decision, with two members wanting a half point cut while two other members favoured keeping rates on hold.

The Bank also published their latest economic forecast this month. In it they estimate that inflation would peak at 3.5% in the third quarter of 2025 before dropping back to its 2% target in 2027. Looking at GDP growth the Bank now expects 1% growth this year with this rising slightly to 1.25% in 2026. This was based on the assumption that the “reciprocal” tariffs the Trump administration imposed on other countries would remain paused but that high barriers between the US and China would persist.

UK inflation picked up strongly in April

The ONS has also published data on April’s Consumer Price Index (CPI) inflation this month. This showed that CPI inflation rose to 3.5% in the 12 months to April 2025, up from 2.6% in the 12 months to March (Figure 2).

Figure 2: CPI, goods, services and core annual inflation rates, UK, April 2020 to April 2025  

Source: ONS, GLA Economics

This rise in inflation was higher than expected by most surveyed analysts. Looking at the data in more detail the ONS observed that the largest downward contribution to inflation “came from housing and household services, transport, and recreation and culture; the largest, partially offsetting, downward contribution came from clothing and footwear”.

Beyond the headline inflation figure other inflation measures also rose. Core CPI (excluding volatile energy, food, alcohol and tobacco prices) inflation increased to 3.8% over the year to April 2025, up from 3.4% in March. The CPI goods annual rate rose to 1.7% up from 0.6%. While the CPI services annual rate rose to 5.4% in April up from 4.7% in March. However, looking forward there was more positive news on future cost of living pressures in terms of household energy costs with Ofgem announcing a reduction in the energy price cap from July. The new cap will mean a typical annual household energy bill for a dual-fuel customer paying by direct debit will cost £1,720, down from the current level of £1,849. This is a 7% fall but prices remain significantly higher than before the Russian invasion of Ukraine.

Significant falls in inward migration – with sustained falls signalled by government

The latest ONS data points to UK net migration nearly halving, from roughly 860,000 in 2023 to 431,000 in 2024. This record drop was driven by fewer work visas and study-dependant visas, with Non-EU work-related visa acceptance falling by roughly 190,000, and study-visa related acceptance falling by roughly 150,000.

Changes outlined in the new immigration white paper are likely to further reduce inward migration through the closure of the care visa route, new restrictions on the Skilled Worker visas, and shortened Graduate visa terms. These observed (and proposed) changes have substantial labour market implications for key sectors in London. Roughly 30% of NHS staff in London are non-British nationals (35% of doctors and 27% of nurses) – and a substantial portion (63%) of London’s hospitality sector workforce is non-UK born. International workers also make an important contribution to the tech sector, with around 39% of the workforce in the Information and communication sector being foreign-born. With London’s vacancy rate usually above the UK average, these changes are likely to increase pressure on sectors where domestic recruitment remains a challenge.

It is important to note that the latest data reflects the previous government’s migration restrictions, which have yet to fully materialise in the data – and that generally, the effects of migration are not immediately felt in the labour market. The migration observatory states that “there are still some falls to come due to the previous government’s tightening of the rules, while the new white paper will have a smaller impact.” Upcoming analysis on (1) employment patterns by nationality and (2) the Employer Skills Survey will explore these developments further.

Other than the potential labour shortages discussed above, migration falling at such pace also affects the housing picture.We might initially expect falling migration to pass through quickly to falling housing demand (and subsequent easing of rental pressures), but the picture is complex. London has a high reliance on non-UK construction workers, which could affect efforts to meet London’s housing targets – hindering efforts to alleviate housing cost pressures.

Trade developments between the UK and the EU, India, and the US present improved trading relations

This month saw a number of trade deals for the UK of various scope and breadth. The 19th May UK–EU summit marked a modest but tangible shift in relations between the trading partners, with direct implications for London’s economy.

• SPS Alignment: The agreement to pursue dynamic alignment on sanitary and phytosanitary (SPS) measures will ease food trade frictions that directly impact London’s hospitality sector, as restaurants and hotels in the capital source a significant proportion of their stock from EU countries.
• Youth Mobility & Erasmus+: A proposed youth mobility scheme and steps towards rejoining Erasmus+ would boost London’s labour supply pipeline. The Centre for European Reform estimates a youth mobility scheme could add 0.45% to UK GDP over a decade – and London’s tech and creative sectors (facing acute skills shortages) stand to benefit immediately.
• ETS Linkage & Energy Cooperation: Plans to link emissions trading systems (ETS) between the UK and EU could protect London-based firms from future EU carbon border taxes, potentially saving UK exporters up to £800 million annually. Although these savings primarily impact firms in manufacturing (outside of London), the move supports London’s ambitions to lead in green finance, providing a more stable pricing environment for “green” (ESG-aligned) investments.

These developments do not, however, address the broader frictions for London’s professional services sector (a substantial portion of total output) – and without progress on reducing regulatory barriers (and the resulting increased compliance costs), the bulk of the post-Brexit cost-pressures are likely to persist, at least in London.

Elsewhere, despite stalled talks on a comprehensive free trade agreement, recent developments from April’s UK-US Trade and Investment Council (TIC) meeting offer some targeted wins for the capital’s economy. The TIC has so far prioritised regulatory dialogue in strategic areas rather than pursuing a full Free Trade Agreement (FTA), focusing on:

• regulatory cooperation in emerging sectors like AI, fintech, and quantum computing. This directly impacts London’s tech sector, which attracted record venture capital in 2024.
• digital trade, including secure data flow frameworks, which are vital for London’s financial and creative industries. A proposed “data bridge” could allow certified UK companies to transfer personal data to U.S. partners without extensive legal checks—crucial for London’s fintech, legal tech, and creative industries. The city is home to over 3,000 fintech firms, and the sector accounted for £11 billion in revenue in 2023.

However, the absence of comprehensive federal-level market access continues to limit full-scale benefits – but sectoral cooperation is meaningful, especially in the sectors highlighted above.

Regarding goods with less relevance to the capital, the developments have led to the US agreeing a quota of 100,000 vehicles for UK automotive imports at a 10% tariff rate (and an accompanying arrangement for auto parts). The US has also agreed to construct a quota at most favoured nation (MFN) rates for UK steel and aluminium (and certain derivative steel and aluminium products).

Finally although the exact, legally-binding text of the UK-India FTA is yet to be finalised, it is expected to be substantial and is primarily expected to:

• eliminate or reduce tariffs on 90% of UK goods exports to India – and provide UK firms with access to India’s public procurement market (estimated at over £38 billion annually).
• liberalise market access for UK financial, legal, and business services, providing a “level playing field” with Indian firms – and include provisions to support digital trade, intellectual property protection, and cross-border data flows.
• facilitate mutual recognition of professional qualifications, supporting labour mobility – and create targeted mobility routes for certain occupations (e.g. tech consultants, chefs, musicians), with streamlined visa processes and exemptions from dual social security contributions.

Department for Business and Trade analysis projects that the agreement will boost UK GDP by £4.8 billion annually in the long term, with bilateral trade expected to increase by £26 billion each year by 2040. Given London’s status as the UK’s primary hub for services exports (a key component of negotiations), the capital is poised to benefit substantially from this growth – with the City of London Corporation estimating that modest financial services liberalisation alone could boost exports by hundreds of millions annually.

US sovereign credit rating downgraded by Moody’s

This month saw the credit ratings agency Moody’s downgrade US government debt from triple A status by one notch to Aa1. Commenting on its decision it noted that “while we recognise the US’s significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics”. With it adding “this one-notch downgrade on our 21-notch rating scale reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns”. This means that for the first time in history none of the three main ratings agencies now rate US debt as triple A with S&P having downgraded it in 2011 and Fitch in 2023.

This month also saw the publication of the second estimate of US GDP for Q1 2025. This showed an annualised fall of 0.2% compared to an annualised increase of 2.4% in Q4 2024. However, this decline seems to have been driven by a rush by US companies to buy goods from abroad before the Trump administration’s tariffs came into effect with US imports rising by an annualised 41% during the quarter.

The Trump administration’s tariff policy was thrown into question on 28 May when a Federal court, the Court of International Trade, ruled that the President had exceed his powers in unilaterally imposing tariffs on nearly every country in the world.

Growing financial pressures on higher education providers

The annual report from the Office for Students (OfS) into the financial stability of higher education institutions has highlighted the increasing number of these institutions in the UK reporting financial deficits. Thus in 2024-25 45.2% were reported to be in deficit, up from 29.6% in the previous year. This is in part being blamed on weaker than expected international student numbers with OfS data showing numbers were 15.5% lower than forecast in 2023-24 with entrant numbers in 2024-25 expected to be 21% below what they had been forecast to be. Commentating on these deficits the OfS said that it showed that “significant reform and efficiencies” were needed in these institutions.

London’s Housing Challenge: Sales Stagnation and Rental Inflation

London’s housing and rental market continue to place distinct pressures on Londoners. Anaemic price growth and cautious investment activity remains in the sales market, while tenants in the rental market face increasingly high rental inflation.

The ONS House Price Index reported London’s average house price at £558,000 in March 2025, up 1% year-on-year. Halifax and Nationwide data for April shows similar rises (of 1.3% and 1.9% respectively). All three sources point to prices growth in London far below the rest of the UK regions. In the face of increases in supply and a more cautious buyer’s environment, modelling from Knight Frank (industry experts) points to flat house price growth across London throughout 2025, with prices in central London actually modelled to fall 1.6% this year. On one hand, this means homeowners are seeing minimal-to-no returns on their purchases (with real-terms losses for some) – but on the other, cooling house prices maintains affordability levels for Londoners aiming to buy.

In the rental market, however, prices continue to soar. According to the ONS, average monthly rents in London reached £2,200 in April, increasing 8.4% on year. Knight Frank’s most recent forecasts indicate a cumulative 5-year rental growth of over 17%, reflecting continued structural pressures on London’s rental market. This intensifies cost-of-living pressures, pushing Londoners to spend increasing portions of their take-home pay on housing costs, rather than broader consumption.

London’s labour market continues to show softness

Labour market conditions were little changed in the latest quarter, according to ONS data. While pay growth continues to be robust, unemployment remains at elevated levels and the number of payrolled employees in London continued to drift lower from the high-point in mid-2024. That softness includes falling job numbers in some of London’s key industries including IT, hospitality and construction, all of which have seen declines of over 3% in the last year.

Looking at the data in more detail the most timely estimate of payrolled employees (subject to revision) shows a fall of 15,900 (-0.4 percentage points (pp)) in the number of payrolled employees in London between March and April 2025, and a decrease of 0.9% on the year. London’s unemployment rate was estimated at 6.2%, up on the three months to March 2025 and an increase of 1.6pp from a year earlier. The UK average was 4.5%. However, London’s inactivity rate (the measure of those not looking and/or not available to work) was estimated at 20.7%. This was a fall of 1.1pp on the previous year, and a fall on the quarter. It is lower than the UK-wide estimate of 21.4%.

GLA Economics will continue to monitor all these and other aspects of London’s economy over the coming months in our analysis and publications, which can be found on our publications page and on the London Datastore.