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

• The latest monthly growth figures from the ONS showed U.K. 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 U.K. economy shrank again in May, data showed Friday.

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.

Sanjay Raja, chief U.K. economist at Deutsche Bank, predicted that GDP growth would edge up on a monthly basis in May, but tempered expectations going forward.

“Where to next? Relative to our baseline projections, downside risks have emerged around our Q2-25 and 2025 annual projections,” Raja said in emailed comments Thursday.

“The 'awful April' GDP print sets us back a tenth on our quarterly GDP projection (our nowcasts are running closer to 0.1-0.2% quarter-on-quarter versus our official projection of 0.25% q-o-q). This also raises a tenth downside to our annual growth projection of 1.2%,” he said.