UK economy contracts again in May, missing expectations for slight rebound

The U.K. economy unexpectedly shrank again successful May, information showed Friday, failing to shingle disconnected the interaction of U.S. tariffs and concern uncertainty.

The latest monthly maturation figures from the Office for National Statistics showed U.K. gross home merchandise (GDP) contracted 0.1% month-on-month successful May. Analysts polled by Reuters had expected a 0.1% expansion.

Weakness was concentrated successful accumulation output, down 0.9%, and construction, which fell 0.6%. The figures volition travel arsenic a stroke to Finance Minister Rachel Reeves, who has made rebooting economical maturation and reducing the U.K.'s fund deficit her halfway aims.

The latest information follows a contraction of 0.3% successful April, when home taxation rises were introduced and U.S. President Donald Trump announced tariffs connected trading partners and adversaries alike. The tariffs frenzy sent planetary markets into a tailspin and created wide concern uncertainty.

The U.K. was deed with a 10% "reciprocal tariff" from Trump contempt having a more-or-less balanced trading narration with the U.S. erstwhile it comes to the speech of goods, though it runs a ample surplus erstwhile it comes to services, according to ONS commercialized information for 2024.

Britain has since struck a commercialized woody with the U.S., however, becoming the archetypal state to bash truthful arsenic tetchy commercialized talks proceed for different trading partners, including the European Union which is inactive waiting to motion a commercialized statement with Washington.

Despite having the comfortableness of a U.S. commercialized deal, the U.K. is facing home economical headwinds and the archetypal quarter's bumper 0.7% enlargement successful GDP (attributed to a apt frontloading of economical enactment up of Trump's commercialized tariffs) is not expected to beryllium repeated successful consequent quarterly updates. The archetypal estimation of 2nd 4th (Q2) GDP is owed connected Aug. 14.

Instead, economists expect maturation to dilatory successful the remainder of the twelvemonth amid a weaker jobs market and ongoing economical uncertainty, portion the Bank of England forecasts a lackluster 1% maturation complaint successful 2025.

U.K. concern groups accidental they besides look a situation from a emergence successful the nationalist surviving wage and employers' nationalist security contributions introduced successful April.

In a Friday note, Suren Thiru, economics manager astatine the Institute of Chartered Accountants successful England and Wales, said that an August involvement complaint chopped from the BOE present appeared "inevitable," adjacent with latest inflation figures backmost up supra 3%.

"These downbeat figures undoubtedly summation anxiousness implicit the wellness of the U.K. economy, with tumbling operation and manufacturing enactment causing a disheartening diminution successful wide output," Thiru said successful emailed comments.

The BOE has trimmed involvement rates from 5.25% to 4.25% implicit the past year, implementing a slower gait than its peers successful the European Central Bank, which slashed its cardinal complaint from 4% to 2% implicit the period. As of Friday morning, wealth marketplace pricing suggests a astir 80% probability of an August cut.

Bank of England Governor Andrew Bailey told CNBC earlier this month that "the way of involvement rates volition proceed to beryllium gradually downwards," adding it was not imaginable astatine the clip to marque a telephone connected August policy.

Sanjay Raja, Deutsche Bank's main U.K. economist, said the May GDP figures indicated some the BOE and his ain expectations for 0.25% maturation successful the 2nd 4th were "too strong," noting a complaint of 0.1% was much likely.

He nevertheless added that the system was not "faltering," with indicators including stronger household and concern sentiment, steadfast recognition conditions and the latest purchasing managers' scale figures inactive pointing to an wide rebound.

"But we volition request a planetary manufacturing betterment to kickstart the sector. This is the large chartless for the U.K. economy," Raja said.