London.
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The U.K. economy unexpectedly shrank again in May, data showed Friday, failing to shake off the impact of U.S. tariffs and business uncertainty.
The latest monthly growth figures from the Office for National Statistics showed U.K. gross domestic product (GDP) contracted 0.1% month-on-month in May. Analysts polled by Reuters had expected a 0.1% expansion.
Weakness was concentrated in production output, down 0.9%, and construction, which fell 0.6%. The figures will come as a blow to Finance Minister Rachel Reeves, who has made rebooting economic growth and reducing the U.K.’s budget deficit her core aims.
The latest data follows a contraction of 0.3% in April, when domestic tax rises were introduced and U.S. President Donald Trump announced tariffs on trading partners and adversaries alike. The tariffs frenzy sent global markets into a tailspin and created widespread business uncertainty.
The U.K. was hit with a 10% “reciprocal tariff” from Trump despite having a more-or-less balanced trading relationship with the U.S. when it comes to the exchange of goods, although it runs a large surplus when it comes to services, according to ONS trade data for 2024.
Britain has since struck a trade deal with the U.S., however, becoming the first country to do so as tetchy trade talks continue for other trading partners, including the European Union which is still waiting to sign a trade agreement with Washington.
Despite having the comfort of a U.S. trade deal, the U.K. is facing domestic economic headwinds and the first quarter’s bumper 0.7% expansion in GDP (attributed to a likely frontloading of economic activity ahead of Trump’s trade tariffs) is not expected to be repeated in subsequent quarterly updates. The first estimate of second quarter (Q2) GDP is due on Aug. 14.
Instead, economists expect growth to slow in the rest of the year amid a weaker jobs market and ongoing economic uncertainty, while the Bank of England forecasts a lackluster 1% growth rate in 2025.
U.K. business groups say they also face a challenge from a rise in the national living wage and employers’ national insurance contributions introduced in April.
August rate cut
In a Friday note, Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said that an August interest rate cut from the BOE now appeared “inevitable,” even with latest inflation figures back up above 3%.
“These downbeat figures undoubtedly increase anxiety over the health of the U.K. economy, with tumbling construction and manufacturing activity causing a disheartening decline in overall output,” Thiru said in emailed comments.
The BOE has trimmed interest rates from 5.25% to 4.25% over the last year, implementing a slower pace than its peers in the European Central Bank, which slashed its key rate from 4% to 2% over the period. As of Friday morning, money market pricing suggests a roughly 80% probability of an August cut.
Bank of England Governor Andrew Bailey told CNBC earlier this month that “the path of interest rates will continue to be gradually downwards,” adding it was not possible at the time to make a call on August policy.
Sanjay Raja, Deutsche Bank’s chief U.K. economist, said the May GDP figures indicated both the BOE and his own expectations for 0.25% growth in the second quarter were “too strong,” noting a rate of 0.1% was more likely.
He nevertheless added that the economy was not “faltering,” with indicators including stronger household and business sentiment, healthy credit conditions and the latest purchasing managers’ index figures still pointing to an overall rebound.
“But we will need a global manufacturing recovery to kickstart the sector. This is the big unknown for the U.K. economy,” Raja said.
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