Britain’s economy delivered an unexpected blow to policymakers on Friday, contracting for the second consecutive month in May and raising serious questions about the government’s growth strategy. The Office for National Statistics reported a 0.1% decline in gross domestic product, following April’s steeper 0.3% contraction, defying economist expectations of a modest 0.1% rebound. The disappointing figures have intensified pressure on Chancellor Rachel Reeves and sparked concerns that the UK economy could be heading toward a quarterly contraction, potentially derailing the Labour government’s central promise to kickstart economic growth after a promising start to 2025.
UK Economy Contracted, Shows Recent Data Raising Concerns
The latest economic data reveals a troubling pattern of declining output that has caught economists and policymakers off guard. Manufacturing output plunged by 1% in May, marking the steepest decline since July 2024, while construction activity fell 0.6% after a brief recovery in April.
Only the services sector provided a glimmer of hope, expanding by 0.1% thanks to strong performance from legal firms and computer programming, though this was insufficient to offset the broader economic weakness.
The consecutive monthly contractions represent a stark reversal from the UK’s robust first-quarter performance, when it outpaced other G7 economies with rapid expansion.
The economic slowdown appears closely linked to external pressures, particularly the impact of US President Donald Trump’s tariff policies that took effect in April. Much of the UK’s early 2025 growth surge was attributed to manufacturers rushing to fulfill orders before the tariff deadline, creating an artificial boost that has since dissipated.
Additionally, a temporary tax break for home purchases that expired in April had provided another short-term stimulus that is no longer supporting economic activity. These factors have left the underlying economy more vulnerable than initially apparent, exposing structural weaknesses that the government must now address.
The implications for the UK’s economic trajectory are significant, with experts warning that a June GDP decline of 0.4% or worse would signal an overall quarterly contraction. This scenario would represent a major setback for Prime Minister Keir Starmer’s Labour government, which has made economic growth its top priority after a year in office.
The disappointing data has already prompted speculation that Chancellor Reeves may need to raise taxes again in her next budget, despite previous hopes to avoid such measures, while also boosting expectations for an August interest rate cut by the Bank of England.
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How Markets Reacted to Surprising and Disappointing UK Economic Data
Financial markets responded swiftly to the disappointing economic news, with the pound weakening 0.2% against the US dollar to 1.36 and declining 0.1% versus the euro to 1.16. The currency movement reflects growing investor concerns about the UK’s economic outlook and the potential for further monetary policy easing.
Meanwhile, broader market indicators from the Financial Times data show the FTSE 100 trading at 8,950.85, down 0.28% for the session, while the S&P 500 posted modest gains of 0.27% to 6,280.46, highlighting the divergent performance between UK and US markets.
The economic contraction has reinforced expectations for monetary policy adjustments, with economists now viewing an August interest rate cut as “inevitable” despite recent inflation concerns. Suren Thiru from the Institute of Chartered Accountants noted that the lack of economic momentum makes further rate reductions likely, as the Bank of England seeks to support growth amid mounting headwinds.
Government bond yields reflect this shifting outlook, with UK 10-year yields at 4.60% compared to 4.36% for US equivalents, indicating continued pressure on UK fiscal conditions.
Looking ahead, the economic data underscores broader challenges facing the UK economy in an increasingly uncertain global environment. The combination of trade tensions, domestic policy adjustments, and structural economic shifts has created a complex landscape for policymakers to navigate.
Disclaimer: The author does not hold or have a position in any securities discussed in the article. All stock prices were quoted at the time of writing.
About the author
Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird’s US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firm specializing in sensing, protection and control solutions.