UK economy shrinks again in May, signalling fragile recovery

The UK economy unexpectedly contracted in May, marking its second consecutive monthly decline and raising concerns about the strength of the country’s post-pandemic recovery. According to data released by the Office for National Statistics (ONS) on July 11, gross domestic product (GDP) fell by 0.1 per cent in May, following a sharper 0.3 per cent drop in April. The contraction caught analysts off guard, as consensus forecasts had anticipated modest growth of 0.1 per cent. The latest figures point to a significant slowdown in the second quarter after the economy posted a 0.7 per cent expansion in the first three months of the year.

May’s downturn was led by a 0.9 per cent drop in production output and a 0.6 per cent decline in construction. Manufacturing, particularly car production and the volatile pharmaceutical sector, weakened, while oil and gas extraction also contributed to the slump. In contrast, the services sector registered some growth, with improvements in legal services helping to partially offset the wider downturn. Retail performance remained notably weak during the month, adding further pressure to the overall economic picture. The May contraction dragged the pound down by 0.2 per cent against the dollar, reflecting growing investor unease.

Tariffs, tax rises, and uncertain outlook

The UK’s economic momentum has struggled to recover from the combined impact of global trade disruptions and domestic fiscal changes. The contraction in April had already been attributed to the introduction of new domestic tax rises and the shockwaves from US President Donald Trump’s sweeping tariff announcements, which included a 10 per cent reciprocal tariff on UK goods.

Despite securing a bilateral trade deal with the United States, the UK has not been insulated from the broader uncertainty caused by shifting global trade dynamics. The initial surge in export activity during the first quarter—fuelled by businesses rushing to beat US tariffs—now appears to have been a one-off boost rather than a sign of sustained growth.

Although GDP grew 0.5 per cent in the March-to-May period, the back-to-back contractions in April and May point to a fragile economic environment. Economists now expect GDP growth to decelerate sharply in the second quarter, with revised forecasts predicting only 0.1 per cent growth, far below earlier expectations.

Meanwhile, the Bank of England, which has already cut interest rates from 5.25 per cent to 4.25 per cent over the past year, faces mounting pressure to act again. Market pricing now reflects an 80 per cent likelihood of a further rate cut in August, despite inflation remaining above 3 per cent.

As the government prepares its autumn budget, rising public debt and recent policy U-turns, particularly on welfare and winter fuel support, have limited fiscal flexibility. With public finances under strain and tax rises looming, economists warn that growth could remain subdued for the rest of the year.