It was good news all around for Rachel Reeves yesterday, it seemed, as the ONS announced that their first estimate of GDP growth for the first quarter of 2025 was 0.7% on the previous quarter. This is a really strong number – an annualised 2.8% – and one which surprised many analysts.

As always, it’s the headline number that gets all the press attention. But it’s worth looking under the bonnet to understand how some of the underlying movements shake out. And while some indicators are broadly positive, others are less reassuring.

Investment has grown strongly

Investment is always the most volatile component of GDP on the expenditure approach, and it has been no exception in the last few quarters.

Total gross fixed capital formation (the component of GDP we often call investment) grew by 2.9% relative to quarter 4 of 2024. The main driver of this was business investment, which grew by 5.9%. This is really good news, although its short-term effect of GDP is likely a bit lower than these numbers would make it seem.

That’s because imports of aircraft were one of the main drivers of the staggering 23% increase in investment in transport. As they were imported, their effect is netted off the UK’s GDP, and instead the sale of those aircraft is reflected in the GDP of the countries where they were produced. In future periods, however, goods and services enabled by these aircraft will add to the UK’s GDP, as is the case with any capital goods.

Investment in information technologies grew quickly as well, by 8%. But there were some worse news on housing and government investment.

General government investment grew only by 0.7% in nominal terms, meaning it fell by 2.7% in real terms. The large discrepancy reflects the continuing rapid increase in the prices of capital goods faced by the government. The Autumn Budget of 2024 had plans to accelerate investment spending, but these could be the first signs of capacity constraints hindering progress in this area.

Private investment in housing was flat in real terms, and is now 3.8% than at the same time a year ago. In fact, private investment in housing did not grow in any quarter of 2024-25; a worrying sign for a government which staked so much of its strategy in delivering large numbers of new houses.

Underlying inflation remains high

The implied GDP deflator – a broader-based measure of inflation, which takes account the composition of the domestic economy rather than just prices faced by consumers – grew by 0.8% in the first quarter of 2025. This is an annualised growth of 3.4% – far above the c.2.5% that we’d expect if the Bank of England were hitting its target.

While this represents a deceleration – the 2024-25 deflator grew by 4.1% – it’s still higher than ideal, and points to inflation continuing to be embedded in the UK economy. It’s also consistent with the high growth in average pay from the latest RTI data (5.8% year-on-year) and raises questions as to how quickly the Bank of England will continue easing monetary policy, especially if headline growth is doing better than anticipated.

The Scottish Government published a pay policy this year – but is it following it?

News broke yesterday that both Unison and Unite members had accepted the NHS Scotland pay offer of 4.25% in 2025-26 and 3.75% in 2026-27. The deal also includes a provision that pay will increase by at least 1 percentage point more than calendar year CPI inflation.

In some sense, the inflation guarantee might not have a direct effect on the outcome of the pay deal: the OBR’s forecast for inflation is more than 1 percentage point below what this pay deal stipulates already. But this bakes in some additional risk for the Scottish Government if a negative shock comes to pass.

Away from the inflation guarantee issue, however, you might remember that the Scottish Government did set out a multi-year pay policy in the 2025-26 Budget, which stipulated that:

• The maximum pay envelope was 9% for those three years, with the spread between years up to the employer;
• Pay deals were expected to cover all three years; if they didn’t the maximum employers could offer in 2025-26 would be 3%.

Eagle-eyed readers might spot two areas in which this NHS Scotland pay deal seems to diverge from the pay policy:

• It does not in fact cover three years, only two. Yet the increase in 2025-26 is well above the limit of 3% set out in the Budget;
• The compound increase in pay scales is 8.2% in the first two years, meaning that – to comply with the pay policy by 2027-28, the maximum offer for that year would have to be 0.8% – or a 1.2% real-terms pay cut. It seems improbable that such a proposal would be accepted just a year workers were given a CPI+1% guaranteed increase.

Last year, we criticised the Scottish Government for not laying out a pay policy in advance of 2024-25, which left it at the mercy of labour market conditions when time came for negotiations. It was therefore a welcome change when we saw not only a one-year policy, but a multi-year one being announced well in advance of the financial year.

This is perhaps too obvious to even bear saying, but having a pay policy is only worthwhile if it’s stuck to. And it’s not clear that’s the case two months into the 3 years this one was supposed to cover.