Britain’s economy is showing encouraging signs, but it’s not entirely in the clear yet

It’s been rare for a string of positive economic news to emerge out of the U.K. in 2025 — but this week in particular has given Britain three reasons to be optimistic.

Data on Friday signaled unexpected positive momentum in the country’s economy, with retail sales rising by a much better-than-expected 1.2% in April, and GfK’s consumer confidence index showing an improvement in sentiment.

Sterling gained 0.6% against the U.S. dollar after the figures were published on Friday, to trade at around $1.35. 

The combination of the two positive figures on Friday bucked expectations, and logic, for some economists. Economic activity in April was widely expected to show a downtrend, in part thanks to U.S. President Donald Trump’s global trade war. 

“Well now, that challenges the idea of a cautious consumer,” said Rob Wood, chief U.K. economist at Pantheon Macroeconomics, adding that a number of factors, some not influenced by politicians or businesses, were at play.

“That said, official sales growth looks too good to be true, likely as the seasonal adjustment fails to adequately control for the later Easter this year,” Wood added. “There’s no doubt the weather helped a lot, with both March and April registering the most sunshine since records began.”

Taken in isolation, Friday’s retail figures and consumer confidence data perhaps point to growth in the current quarter. However, British electricity regulator Ofgem added to the positive sentiment by declaring on Friday that electricity prices are set to decline by 7% in July. That could potentially fuel spending in other sectors in the coming months.

“This is certainly an improvement for household expenses, with monthly bills likely to fall on average by around £11,” said Ellie Henderson, economist at Investec.

Meanwhile, the string of positive elements could potentially bump up U.K. economic growth for the second quarter as a whole, according to Allan Monks, chief U.K. economist at JPMorgan who is forecasting a 0.6% annualised gain.

The U.K. has the fastest economic growth among G7 nations

“With the household savings rate so high, a continued improvement in confidence has the potential to unlock further consumer spending gains,” JP Morgan’s Monks said in a note to clients on Friday. “High inflation, softer wage growth and weak employment argue against a continuation of that trend. But the rise in confidence in May was matched by a notable drop in unemployment fears, lower inflation expectations and a rise in spending intentions.”

The outlook for the U.K. has seesawed over the past year. The country has grappled with setbacks like unexpected economic contraction and mounting concern about fiscal spending plans, while also seeing some more positive data and the agreement of landmark trade deals with the U.S., India and the EU. 

Earlier this week, official figures showed the economy grew by 0.7% in the first quarter of 2025 — although that came as domestic inflation surged to 3.5% in April. Last week, another data print showed average earnings in the U.K. had grown by 5.9% on an annual basis.

The mix of data meant economists appeared divided on Friday about what the latest bout of data meant for the U.K.’s long term economic picture. 

Alex Kerr, U.K. economist at Capital Economics, warned that “the sun won’t shine on [Britain’s] retail sector forever.”

“Although for the first time since 2015, excluding the pandemic, retail sales volumes have risen for four months in a row, April’s impressive 1.2% m/m rise was largely driven by the unusually warm weather,” he said in a note sent shortly after the figures were published.

“That boost won’t last. So even though consumer confidence ticked up slightly in May, we suspect retail sales growth will slow over the coming months.”

‘Depressed’ Brits resorting to retail therapy

While most economists viewed the small increase in consumer confidence in May as a positive signal for next quarter’s economic growth, others suggested that as overall sentiment remains below pre-pandemic levels, the link between spending and sentiment may be broken instead.

“Depressed British consumers have resorted to retail therapy to cope with their economic and financial woes,” said Andrew Wishart, senior UK economist at Berenberg.

Instead, Wishart said a combination of the pandemic, and the ensuing inflation and interest rate hikes led consumers to shore up their finances.

“Households have increased their saving rate (the share of household income not spent) to a level previously unseen outside of periods of mass unemployment,” Wishart added.

Having stabilized their bank balances and secured pay rises, consumers are now spending in anticipation of a more stable interest rate and price environment, according to the economist. 

Counter intuitively, the additional spending means the Bank of England was more likely to hold rates for the rest of the year, than cut, he added.

Janet Mui, head of market analysis at wealth manager RBC Brewin Dolphin, said in an email on Friday morning that with wage growth now outpacing inflation, U.K. households are spending more generously. However, she cautioned that the state of Britain’s public finances “remain a constraint.”

“With higher borrowing costs, more tax rises and departmental spending cuts may happen,” she explained. “This poses some medium-term growth risks for the U.K amid ongoing uncertainty with how the global trade situation will settle.”