UK Economy Grows by 0.7%: What’s Driving the Recovery?
The UK economy expanded by 0.7% in the second quarter of 2025, according to the latest figures released by the Office for National Statistics (ONS). This marks the strongest quarterly growth since mid-2022 and signals a firm rebound from the stagnation and mild recession that characterized much of 2023.
A Shift in Momentum
After months of subdued performance due to high inflation, rising interest rates, and global uncertainty, the recent growth reflects a significant turning point. The UK’s economic output has now returned to pre-pandemic levels, and confidence is slowly returning to both consumers and businesses.
So, what’s driving the recovery?
Consumer Spending on the Rise
One of the main drivers behind the 0.7% increase in GDP is a noticeable uptick in consumer spending. Falling inflation — down to 2.1% in July — has improved real incomes and lifted household confidence. Retail sales rose by 1.3% over the quarter, particularly in sectors such as hospitality, entertainment, and non-essential retail. The warmer-than-usual summer also contributed to a tourism boost, with both domestic and international travel showing strong gains.
Housing Market Rebounds
The housing market, which had been cooling over the past year due to high borrowing costs, is showing signs of recovery. Mortgage approvals rose by 8% in June, helped by a series of modest interest rate cuts by the Bank of England. Lower mortgage rates have encouraged first-time buyers and investors back into the market, stimulating associated industries such as construction and home goods.
Business Investment and Manufacturing Growth
Business investment rose by 0.9% in Q2, spurred by improved economic outlook and government incentives for innovation and green infrastructure. Manufacturing output also grew by 1.2%, supported by recovering supply chains and growing demand for British-made goods, particularly in the electric vehicle and aerospace sectors.
The services sector — which makes up around 80% of the UK economy — expanded by 0.6%. Financial services, professional services, and tech firms reported steady growth, though some sub-sectors such as recruitment and real estate services remain below pre-2020 levels.
Government Policy and Global Trends
Recent government measures aimed at stimulating economic activity, including targeted tax breaks for small businesses and increased infrastructure spending, have also contributed to the bounce-back. Meanwhile, the easing of global supply chain disruptions and the stabilisation of energy prices have reduced cost pressures across the board.
Internationally, stronger growth in the U.S. and parts of Europe has lifted demand for UK exports, particularly in pharmaceuticals, chemicals, and digital services.
Cautious Optimism Ahead
Despite the positive figures, economists urge caution. “While the 0.7% growth is encouraging, challenges remain,” said Sarah Lane, Chief Economist at Beacon Analytics. “Geopolitical risks, lingering inflationary pressures, and uncertainty around future interest rate policy could still affect the recovery’s pace.”
The Bank of England is expected to maintain its cautious approach, weighing inflation trends against the need to support growth. A continued slowdown in inflation could open the door to further rate cuts by early 2026.
For now, the latest figures offer a welcome dose of optimism, suggesting that the UK economy is gradually regaining its footing after several turbulent years.
Published: 25th August 2025
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