UK economy contracts sharply in April amid Trump tariffs and property tax shock

The UK economy shrank by 0.3 per cent in April 2025, its steepest monthly contraction since October 2023, as official data released on June 12 showed a sharp fall in exports and weaker consumer activity.

The contraction was significantly worse than economists’ forecast of a 0.1 per cent decline and followed modest growth of 0.2 per cent in March and 0.5 per cent in February.

The Office for National Statistics (ONS) attributed the decline primarily to the end of a temporary tax break on property purchases and a collapse in goods exports to the United States following the imposition of new US tariffs.

Legal and real estate services, along with car manufacturers, were among the worst-hit sectors.

“After increasing for each of the four preceding months, April saw the largest monthly fall on record in goods exports to the United States, with decreases seen across most types of goods,” Liz McKeown, Director of Economic Statistics at the ONS, told the press.

Despite the monthly slump, GDP rose 0.7 per cent in the three months to April, but the latest figures have prompted concern about the UK’s growth trajectory amid rising costs and international trade tensions.

Exports plunge amid US tariffs

The most significant blow to April’s output came from a dramatic decline in trade with the US. British goods exports to America dropped by £2 billion ($2.7 billion) in a single month—the largest monthly fall since records began in 1997—driven by tariffs introduced by US President Donald Trump earlier this year.

The US imposed wide-ranging duties of up to 25 per cent on key British exports, including steel, aluminium, and automobiles.

The car industry, Britain’s top goods exporter to the US, saw output cut and exports tumble as manufacturers scrambled to adjust. One in eight cars built in the UK is exported to the US, underscoring the sector’s vulnerability.

Manufacturing as a whole contracted by 0.6 per cent in April, while services—which account for around 80 per cent of UK economic output—shrank by 0.4 per cent. Real estate, legal services, and financial intermediaries suffered sharp declines, with the end of the property tax holiday also causing a drop in housing transactions.

Meanwhile, the UK’s trade deficit in goods widened by £4.4 billion ($5.96 billion) to £60 billion ($81.39 billion) in the three months to April. The country’s surplus in services, often a stabilising factor, dipped by £500 million ($678.22 million) to £48.5 billion ($65.78 billion).

Though the UK and US announced a preliminary trade deal in early May, it has yet to be fully implemented. A 10 per cent blanket tariff still applies to most British goods, and higher levies on car and steel exports remain in place, with a final agreement expected by July 9.

Tax burden, job cuts add to economic strain

Alongside external trade shocks, domestic policy changes also weighed on output. The rise in employer National Insurance contributions in April, coupled with higher energy, water, and council tax bills, added to business costs.

Employers now pay 15 per cent in national insurance contributions, up from 13.8 per cent, on employee earnings above £175 per week ($237.38).

Figures from HMRC show that payroll employment fell by 109,000 in May—the largest drop since the first Covid-19 lockdown in 2020. Since Chancellor Rachel Reeves’s autumn budget, more than 250,000 jobs have reportedly been lost.

Reeves acknowledged the disappointing figures, calling April a “challenging month” for businesses. However, she reaffirmed her government’s commitment to growth. “Our number one mission is delivering growth to put more money in people’s pockets through our Plan for Change,” she said on June 12.

Business sentiment remains cautious, with firms reportedly scaling back hiring and investment due to uncertainty around tariffs and rising labour costs. A survey by Schroders found that 63 per cent of institutional investors and wealth managers view trade tensions and tariffs as the top macroeconomic risk.

Markets react

Financial markets showed a muted response to the GDP figures, with the FTSE 100 initially dipping before edging up slightly. The index had closed at a record high on June 11, buoyed by strong earnings and global investor optimism.

Sterling fell by a quarter of a cent against the dollar following the release of the economic data, reflecting concerns over the UK’s growth prospects amid external and internal pressures.

While the Bank of England is expected to hold interest rates steady at its next meeting, policymakers face a delicate balancing act between persistent inflation and signs of economic fragility.

With growth faltering, exports falling, and businesses reeling from rising costs, the outlook for the UK economy remains highly uncertain—and much may depend on the resolution of the ongoing US tariff standoff in the months ahead.