UK GDP’s February in Perspective

As tariff chatter continues to lead headlines in financial publications we follow, the UK released some positive economic news last Friday: February gross domestic product (GDP, a government-produced measure of economic output) grew more than expected, and January’s -0.1% m/m dip was revised up to flat.^[i] Financial commentators correctly, in our view, added context behind the numbers (i.e., a surge in manufacturing was likely tied partly to tariff frontrunning), but some worry the UK’s near-term economic prospects look bleak due to the trade conflict. Whilst February’s report says nothing about the rest of the year, the underlying data suggest industries not affected directly by tariffs are holding up just fine. In our view, that implies the UK entered the global trade conflict on solid ground—not that we see much evidence tariffs would hit Britain particularly hard anyway.

February GDP rose 0.5% m/m, with growth across the three main economic sectors (services: 0.3%, production: 1.5% and construction: 0.4%).^[ii] Based on our review of the coverage, manufacturing, a production subsector, grabbed a lot of attention for its 2.2% m/m jump—the largest rise in 20 months—rebounding from January’s revised -1.0% slip.^[iii] Manufacturing’s February expansion was broad-based, with 10 of 13 subsectors expanding—and computer, electronic and optical products, basic pharmaceutical products and pharmaceutical preparations and transport equipment leading the way.^[iv]

In our view, most coverage sensibly pointed out February’s manufacturing surge likely reflected companies building up inventory in preparation for US tariffs. The UK manufacturing subsets contributing most in February were industries in possible tariff crosshairs based on our research (e.g., US President Donald Trump has discussed taxing pharmaceutical imports for months).^[v] Moreover, tariff frontrunning has been commonplace worldwide as evidenced by recent datasets (e.g., recent Chinese exports and the eurozone’s January industrial production).^[vi]

The UK was actually an anomaly in that regard, as its recent heavy industry data didn’t align with trends elsewhere. One likely influencing factor: The UK metals industry’s domestic headwinds. Production has been mixed due in part to the UK steel industry’s transition from blast furnaces to electric arc furnaces.^[vii] The industry has long suffered under high energy costs and other headwinds, a problem highlighted again over the weekend as the UK government took control of British Steel’s Scunthorpe plant, the UK’s last “virgin steel” producer, which its ownership claimed was losing about £700 million per day and was planning to close.^[viii]

Strong February manufacturing aside, we have seen many observers claim gathering headwinds—namely, America’s trade policy and hikes to the UK’s minimum wage and Employer National Insurance Contribution (NIC)—will hinder the UK economy going forward. The supposed upshot: Big picture, UK growth still looks imperiled.

We agree a big-picture look can put things in perspective, yet when doing so, we think it becomes evident Britain isn’t likely to see a huge effect from American tariffs. Perhaps that sounds dismissive. But the UK faces only the 10% universal tariff and no reciprocal levies—even if they come back from pause on other nations.^[ix] Most of the UK’s exports are services, not goods, which aren’t subject to Trump’s tariffs.^[x] As for scale, on an individual country basis, America is the UK’s largest trading partner (accounting for 22% of exports and 13% of imports in 2023).^[xi] But the European Union as a bloc is by far the UK’s most important trade relationship (accounting for 41% of UK exports and 51% of imports in 2023).^[xii] US tariffs also wouldn’t prevent the UK from continuing to trade globally.

Then there are the ongoing negotiations between both sides. On Tuesday, US Vice President JD Vance said there was a “good chance” of reaching a trade deal with the UK, and whilst politicians’ words should always be taken with a grain of salt (or maybe many grains), we think it speaks to most countries’ apparent willingness to negotiate with the US.^[xiii] Meanwhile, the UK also announced a two-year suspension of dozens of tariffs this week, further demonstrating increased openness.^[xiv] As for the NIC hikes, they are an additional expense for businesses. But they also aren’t the big economic negative many think they are, as companies can find ways to navigate those costs (e.g., reducing hours worked) to keep operations going.

In our view, what has gone overlooked amidst manufacturing’s pop: the services sector’s ongoing growth. February activity rose in 9 of the 14 subsectors, and consumer-facing services climbed 0.7% m/m after a -0.1% dip in January.^[xv] Now, tariff frontrunning may have contributed to February’s expansion, too. Wholesale and retail trade and repair of motor vehicles were amongst the month’s biggest contributors.^[xvi] Perhaps that reflected firms’ building up inventory or getting business done before tariffs (and the associated higher costs) take effect. But we think the more purely services parts of the sector look solid, too. The business services and finance industry has grown three straight months.^[xvii] Drilling down deeper, accommodation and food service activities and information and communication subindustries grew 1.4% m/m and 2.2%, respectively, in February.^[xviii] This isn’t solely a tariff frontrunning story, in our view.

Looking at the past couple years, services has grown relatively steadily as manufacturing waffled—a fully global trend, based on our research.^[xix] (Exhibit 1) The former isn’t expanding at a gangbusters rate. But the upward trend in a sector that comprises nearly 80% of GDP suggests the UK economy probably isn’t in the dire straits many claim.^[xx]

Exhibit 1: UK Services and Manufacturing Indexes Over the Past Two Years

Source: Office for National Statistics, as of 14/4/2025. Index of Services and Index of Production (Manufacturing), February 2023 – February 2025.

Based on our observations, investor fear remains rampant today, and many presume tariffs will knock already weak growth in the UK and developed world more broadly. To us, that signals expectations are quite low—which means reality has a low bar to clear to beat them.