UK economy shrinks again in May, raising new worries amid global headwinds

Britain's economy contracted unexpectedly for a second month running in May, adding to worries at home for finance minister Rachel Reeves in an increasingly uncertain global environment, official data showed on Friday. 

Gross domestic product declined by 0.1 per cent after a 0.3 per cent drop in April, the Office for National Statistics said. 

Economists polled by Reuters had mostly forecast that gross domestic product would rise by 0.1 per cent from April's level. While the services sector eked out a sliver of growth, declines in industrial output and construction dragged down overall output. 

The reading poses downside risks to expectations that the economy grew in the second quarter of 2025, after a surge early in the year. It boosted expectations that the Bank of England will cut interest rates next month. 

 

"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," said Suren Thiru, economics director at accountancy body ICAEW. 

Prime Minister Keir Starmer's Labour government has struggled to meaningfully improve growth in its first year in office. 

Economists say it looks increasingly likely that Reeves will need to raise taxes again in her next budget - something she had hoped to avoid. 

"While today's figures are disappointing, I am determined to kickstart economic growth and deliver on that promise," Reeves said of Friday's data. 

 

Britain's economy expanded rapidly in the first quarter of 2025, outstripping growth in other countries in the Group of Seven advanced economies. In May the Bank of England revised up its full-year growth forecast to 1 per cent. 

However, much of the growth in early 2025 was likely to have been linked to the expiry of a tax break for some home purchases in April which boosted the sector before the deadline, and a rush by manufacturers to beat higher US import tariffs. 

The BoE has said it thinks the economy grew by about 0.25 per cent in the second quarter of 2025. To achieve any growth for the quarter, the ONS said June's monthly data would need to show at least a flat reading, assuming no revisions to earlier months. 

A month-on-month contraction of 0.4 per cent or worse for June would herald a quarterly contraction. 

"The second straight decline in monthly real GDP in May will increase concerns that the government's growth plan has been derailed by external and domestic shocks," said Raj Badiani, economics director, Europe, at S&P Global Market Intelligence. 

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