Blow to Chancellor as UK economy shrank unexpectedly in May

Yahoo

11-07-2025

The UK economy contracted unexpectedly in May, marking the second month in a row of falling output and heaping further pressure on Chancellor Rachel Reeves.
The Office for National Statistics (ONS) said gross domestic product (GDP) contracted by 0.1% in May, following a 0.3% drop in April.
Most economists had expected the economy to rebound with slight growth of 0.1% in May.
The economy could now be heading for a contraction overall in the second quarter of the year, which would be a blow to Ms Reeves and the Government's key priority to drive economic growth.
The pound was weaker after the data, falling 0.2% to 1.36 US dollars and 0.1% lower at 1.16 euros.
Ms Reeves said the figures were 'disappointing' but renewed her pledge to boost economic growth.
She said: 'Getting more money in people's pockets is my number one mission.
'While today's figures are disappointing, I am determined to kickstart economic growth and deliver on that promise.'
If GDP fell by 0.4% or worse in June, it would mean the economy overall contracted in the second quarter.
Shadow chancellor Mel Stride said the May GDP figures will 'pile even further pressure for tax rises in the autumn'.
Experts said the weak May figure reinforces views that the Bank of England will cut interest rates again in August.
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales (ICAEW), said: 'The UK's growth trajectory in the near term is likely to tilt downwards as any uplift from higher consumer and Government spending is hampered by escalating business caution, amid fears of further tax rises in this autumn's budget.
'The lack of momentum in the UK economy indicated by these sluggish figures means that an August interest rate cut currently looks inevitable, despite the recent spike in inflation.'
The ONS data shows that GDP was weighed on by the manufacturing sector, which suffered another steep decline in activity, and falling construction output.
Activity in the manufacturing sector dropped 1% – the biggest decline since July last year – following a steep 0.7% fall in April, having surged earlier in the year as US importers stocked up before US President Donald Trump's tariff rises, which came into effect at the start of April.
Liz McKeown, director of economic statistics at the ONS, said: 'The economy contracted slightly in May with notable falls in production and construction, only partially offset by growth in services.
'However, across the latest three months as a whole, the economy still grew.
'This reflected strength earlier in the year that resulted, in part, from some activity being brought forward to February and March.'
She added: 'While services grew overall in May with a strong month for legal firms, which recovered from a weak April, and computer programming, these were partially offset by a very weak month for retail sales.'
The data showed the construction sector contracted by 0.6% in May in a sharp reversal of 0.8% growth in April, while the services sector expanded by 0.1% in a bounce back after an upwardly revised 0.3% decline in April.
Economist Matt Swannell, at the EY Item Club, said it was 'all but certain' that GDP would contract overall between April and June as US tariffs continue to weigh on activity.
But Rob Wood, at Pantheon Macroeconomics, said he believed there were 'signs that GDP growth can rebound in June', which would help eke out growth in the quarter.
He said falling output in April and May was largely due to 'erratic factors', such as worries over US trade tariffs.