Production and construction lead second monthly decline; Reeves under pressure to deliver growth
The UK economy unexpectedly contracted by 0.1% in May, marking its second consecutive monthly decline and dealing a blow to the government’s efforts to stabilise growth amid global trade tensions and rising domestic costs.
The latest figures from the Office for National Statistics (ONS) showed that analysts’ expectations for a modest rebound of 0.1% were confounded, with production output plunging 0.9% and construction down 0.6%. Manufacturing—particularly in car production and pharmaceuticals—suffered, while oil and gas extraction also weakened. Retail remained soft. In contrast, the services sector eked out modest gains, helped by a rebound in legal services.
The back-to-back monthly contractions follow a stronger-than-expected 0.7% GDP expansion in Q1, fuelled largely by exporters and homebuyers front-loading activity ahead of newly introduced taxes and tariffs. But that early momentum has clearly faded. With April GDP down 0.3% and May now in negative territory, economists expect just 0.1–0.2% growth in Q2, far below previous forecasts.
Tariff ripple effects and domestic headwinds
The economic downturn comes as businesses continue to grapple with the fallout from US President Donald Trump’s 10% “reciprocal” tariffs on UK goods, introduced in April. Though the UK became the first country to secure a bilateral trade deal with the US under the new tariff regime, the wider climate of uncertainty has chilled business confidence.
Chancellor Rachel Reeves, who has made economic growth and deficit reduction her core priorities, described the data as “disappointing” but reaffirmed her commitment to “kickstart economic growth” and “get more money in people’s pockets.”
The weakness in May follows domestic fiscal changes, including tax hikes, a rise in the national living wage, and increased employer national insurance contributions—all of which have squeezed margins and dampened investment.
Opposition parties seized on the figures, with Conservative shadow chancellor Mel Stride accusing Labour of creating a “ticking tax timebomb” through policy U-turns on welfare and fuel support. Liberal Democrat Treasury spokesperson Daisy Cooper warned the figures cast “storm clouds over the heads of many hardworking business owners.”
Rate cut increasingly likely
Economists are now forecasting a Bank of England rate cut in August, with money markets pricing in an 80% probability. Inflation remains above 3%, but the soft growth figures are shifting policy priorities.
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said the data makes a cut “inevitable,” citing “tumbling construction and manufacturing activity.”
Bank of England Governor Andrew Bailey had previously signalled that the path of interest rates would “continue to be gradually downwards,” though he stopped short of confirming an August move. Still, the pace of easing has lagged that of the European Central Bank, which has already slashed rates from 4% to 2%.
Deutsche Bank’s UK chief economist Sanjay Raja said the May data revealed that previous forecasts for 0.25% growth in Q2 were “too strong,” with a more likely outcome now closer to 0.1%. Still, he noted that household sentiment, credit conditions, and purchasing manager surveys offer some hope of a rebound later in the year—if global manufacturing stabilises.
Budget trade-offs and fragile outlook
Looking ahead, fiscal headroom is increasingly constrained. The Office for Budget Responsibility this week warned that the UK’s public finances are in a “relatively vulnerable position,” citing rising debt and government backpedalling on tax rises and spending cuts.
Hailey Low, associate economist at the National Institute of Economic and Social Research, said the government now faces “hard trade-offs” in its autumn budget, with higher taxes or fresh spending cuts likely needed to meet its own fiscal rules.
Despite the gloomy May figures, GDP over the three-month period from March to May still rose by 0.5%, thanks to the strong Q1. But as the front-loaded activity fades and new headwinds accumulate, analysts caution that the UK’s post-pandemic recovery remains fragile—more volatile than robust.
