UK Economy Contracts 0.1% in May, Defying Expectations
In a disappointing turn, official Office for National Statistics figures show the UK economy shrank by 0.1% in May, marking the second consecutive monthly contraction, following a 0.3% dip in April . This comes despite economist forecasts predicting modest growth, highlighting a sharp deceleration after a robust Q1 performance.
🔍 Key Drivers:
- Production slump: Manufacturing, including pharmaceuticals, auto, and oil-and-gas extraction, dropped by 0.9%, dragging overall output down .
- Construction middling: Construction output fell around 0.6% .
- Service sector resilient: Services eked out a small gain (+0.1%), buoyed by legal and tech industries .
📈 Quarterly Perspective:
Despite the monthly dips, the UK economy still recorded +0.5% growth over the three months to May, thanks to front-loaded activity in earlier months .
🧭 What It Means:
- Monetary policy under pressure: Weak data strengthens expectations for a Bank of England rate cut in August, with markets pricing in reductions .
- Fiscal dilemma for government: Chancellor Reeves faces mounting pressure to deliver growth while managing high borrowing and debt. Tax hikes now loom as likely in the autumn Budget .
- External and domestic headwinds: The drop-back from Q1 activity—fueled by tariff and tax deadlines—and rising corporate taxes have weighed on output .
💬 Reactions:
- ONS expert view: The decline was largely due to industrial and construction weaknesses, only partially offset by services strength .
- Market response: The pound slid 0.2% to $1.35, while FTSE 100 remained broadly stable despite mixed economic signals .
- Economic advisors: Industry voices warn against tax hikes, urging pro-growth policies to revive confidence .