16 May 2025: The UK has the fastest-growing economy in the G7, for now

The Government’s publicity machine clicked into top gear yesterday as it celebrated the Q1 GDP figures. The self-congratulation and back slapping when it was announced that the economy had not only grown by 0.7% between January and March but had beaten market predictions of a 0.6% expansion was every similar to what reporters see every day from the Trump administration, who are past masters at spinning a story to their advantage.

In almost every other developed economy, the Q1 data has been greeted with caution, coupled with a footnote regarding front running and orders being placed to try to get out in front of the data, which, in the UK’s case, may be equally newsworthy but for an entirely different reason when the time comes for the Q2 figures to be published.

Rachel Reeves told anyone who would listen that the data shows that her economic plans are working, with the economy beginning to “turn a corner.” The increase in employer national insurance contributions, coupled with the increase in the national living wage, may bring Ms Reeves back to earth with a bump—the original hard landing!

There is little doubt that the economy fared far better than the doom-laden fears of a recession that had accompanied most predictions.

However, one swallow doesn't make a summer, and there may still be tough times ahead even after the trade deal between the UK and the U.S. which has papered over the obvious cracks in the growth story.

If we see similar figures in three months, there will be genuine cause for celebration.

For now, Sir Keir Starmer can celebrate being Prime Minister of the country that has the highest growth rate in the G7. However, the Tories were celebrating the same accolade, just before the sky fell in on their ambitions.

While the figures are a welcome boost for the prime minister and Chancellor, after the economy stagnated through Labour’s first six months in power, experts warned they were artificially inflated by firms boosting production in a bid to dodge the US president’s tariffs.

Sir Keir seized on the figures, describing them as “very good and very welcome”. “I think they show the strength and resilience of the British economy and the potential,” the prime minister said.

And Ms Reeves said the growth figures showed the government was “making the right choices”.

“Today’s growth figures show the strength and potential of the UK economy,” she said. However, that potential needs to be backed up by solid investment to harness its effect.

The pound climbed to a high of 1.3315 following the news and closed at 1.3306.

In a much-anticipated speech yesterday, Fed Chairman Jerome Powell said he saw a near future with the possibility of ups and downs in inflation. He added that he also saw an increased likelihood of “supply shocks” that could disrupt American businesses.

His speech felt like a man who is keeping his powder dry to deal with whatever the economy throws at him next. It didn't sound like a man who is about to comply with his boss’s wishes and cut interest rates.

Every five years, the Federal Reserve reexamines the framework it uses to ensure it is keeping the U.S. economy on a path of full employment and stable price, a congressionally mandated double goal it must achieve with just a few tools, while keeping stock of evolving macroeconomic conditions, the labour market, and GDP growth.

The strategy informs how exactly the Fed will achieve both its goals, which are the bedrock of a stable economy.

The fact that the reexamination does not run in tandem with any change in government is significant and underlines the Fed’s independence.

Yesterday, as the Fed began a conference to discuss how it would maintain maximum employment and 2% long-term inflation, the prognosis was: more turbulence.

“We may be entering a period of more frequent and potentially more persistent supply shocks, a difficult challenge for the economy and central banks,” Fed chair Powell said during the conference’s opening remarks. Turbulence and uncertainty are President Trump’s “stock-in-trade”, so it is very likely that when he returns from playing diplomat in the Gulf, Trump will have a few surprises up his sleeve.

The markets should never be deceived by Trump’s seemingly off-the-cuff pronouncements, like the annexation of Canada. They are designed to keep his actual and potential rivals off balance, and so far this year, the policy seems to be working, even if it is sometimes difficult to decipher the end game.

Powell did not discuss in detail the current state of the economy, instead focusing on its evolution from the post-Great Recession recovery to today. During the recovery period, interest rates were extremely low, while the Fed’s benchmark rate now sits between 4.25% and 4.5%. Rates are higher because inflation could be more unpredictable going forward, Powell said.

“Higher real rates may also reflect the possibility that inflation could be more volatile going forward than during the inter-crisis period of the 2010s,” he said.

In looking back at the past five years under which the Fed’s current framework informed monetary policy, Powell discussed the COVID-19 pandemic, which hit the world shortly after the current strategy was implemented. At the time, the U.S. economy had been in over a decade of low growth, low inflation, and low interest rates. As a result, the plan had been for monetary policy to try and achieve an “intentional, moderate” overshoot of the 2% inflation target in periods when it was below that level, Powell said.

Then the pandemic hit and completely disrupted those plans.

The dollar index attempted to rally above its short-term resistance at 101.20 yesterday, reaching a high of 101.13. It ran out of steam at that point and drifted back to close at 100.83.

The epitome of style over substance, Christine Lagarde is beginning to plan for a future when she is no longer President of the ECB, a job that she is clearly not suited for.

The evolution of the role has made one thing abundant, and that is that given what is needed to perform it, it requires a bureaucrat who is able to fully understand how the markets work and not just try to be a figurehead, while minions scurry around her doing the bidding of those who hold the real power.

Her next role is being openly discussed, and one suggestion seems to be the perfect choice. She is being considered to be the next leader of the World Economic Forum. Being the head of little more than a “talking shop” where few can even remember its incumbent’s name, let alone any achievement, would be perfect.

Organising the annual shindig in Davos would appear to be something she may excel at.

The tricky part will be who will replace her. Schnabel is too hawkish, while de Guindos is not really held in great esteem by his colleagues.

Philip Lane may be next in line. He is a central banker in the truest sense of the epithet. He has seen tough times as Governor of the Irish Central Bank, is sufficiently bureaucratic, in the style of Mario Draghi, but can “rally the troops” when necessary.

Economic growth in the Eurozone came in slightly below expectations in the first quarter of the year, with GDP rising by 0.3% compared to the previous quarter, according to Eurostat. Initial estimates published earlier had indicated a 0.4% growth for the 20 countries in the Eurozone. Growth for the entire European Union (27 countries) also remained steady at 0.3%.

According to preliminary estimates by Eurostat, industrial production in March 2025, compared to February 2025, increased by 2.6% in the eurozone and by 1.9% in the European Union. On an annualised basis, there was an increase of 3.6% in the eurozone and 2.7% across the entire EU compared to March 2024.

German Economy Minister Katherina Reiche plans to "expand and strengthen" trade relations with the United States in the future, as she stressed Washington's continued importance as a partner on the sidelines of EU trade talks on Thursday.

Reiche, who was in Brussels to meet with her EU counterparts for the first time since taking office last week, said the top priority was to resolve the tariff dispute unleashed by US President Donald Trump.

"We are negotiating from a position of economic strength, an economic position of power, but one that must be used carefully," said Reiche. This does sound like she plans to meet the U.S. administration head-on and is prepared to fight fire with fire, something that President Trump has not seen in negotiations with the UK and China.

The Euro remains in a reactive mode as the market awaits trade talks. Yesterday, the single currency fell to a low of 1.1172 but recovered marginally to close at 1.1192.

Have a great day!