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The UK financial system unexpectedly contracted 0.1 per cent in Could, the second month-to-month decline in a row, in an indication that the robust progress seen earlier within the yr has dissipated.
Friday’s determine from the Workplace for Nationwide Statistics adopted a contraction of 0.3 per cent in April and was nicely beneath the 0.1 per cent progress forecast by economists polled by Reuters.
Could’s decline, pushed by falls in manufacturing and building, factors to a pointy slowdown within the second quarter after the fast progress of 0.7 per cent within the first three months of the yr.
The pound fell 0.2 per cent towards the greenback to $1.35 following the information launch.
Professor Joe Nellis, financial adviser at accountancy and advisory agency MHA, mentioned the determine was “a far cry” from the primary quarter, when a surge in exports and a sturdy efficiency within the providers sector positioned the UK among the many G7’s prime performers.
“Progress over the primary half of the yr is now anticipated to be modest,” mentioned Nellis. “This presents a problem to the chancellor — her fiscal headroom stays restricted by excessive ranges of public borrowing and debt and her spending plans are closely reliant on kick-starting the financial system.”
The Labour authorities’s pledge to revive progress is central to funding chancellor Rachel Reeves’ spending plans, as she battles to fill a fiscal gap that economists say may very well be greater than £20bn.
However the Financial institution of England has warned that underlying progress stays weak, including that financial exercise within the first quarter was boosted by one-off elements, equivalent to frontloading actions forward of US tariffs and modifications to stamp obligation.
Reeves mentioned on Friday that the Could GDP determine was “disappointing”, including that she was “decided to kick-start financial progress”.
Suren Thiru, economics director on the Institute of Chartered Accountants in England and Wales, mentioned: “These downbeat figures undoubtedly improve anxiousness over the well being of the UK financial system.”
He added that an August charge reduce from the BoE, which held borrowing prices at 4.25 per cent final month, “at present seems to be inevitable”.
Following the information launch, buyers barely elevated their bets on a quarter-point August reduce. The market expects two reductions by the top of the yr.
ONS director of financial statistics Liz McKeown mentioned Could’s contraction had been pushed by “notable falls in manufacturing and building, solely partially offset by progress in providers”.
She added that the manufacturing decline centred on “oil and fuel extraction, automotive manufacturing and the often-erratic pharmaceutical trade”.
Paul Dales, economist on the consultancy Capital Economics, calculated that even when GDP improved to a flat studying in June, progress would nonetheless have slowed to simply 0.1 per cent total within the second quarter.
“The hangover from the burst of exercise in Q1 continued in Could,” he mentioned, including that he expects “pretty subdued” progress this yr “as a result of lingering drags from a weakening world financial system and the rises in home taxes for UK companies”.
Progress was revised to 0.4 per cent in March, up from 0.2 per cent of preliminary estimates, boosting the growth within the three months to Could to 0.5 per cent, in contrast with the earlier three months.
However McKeown mentioned this mirrored “energy earlier within the yr that resulted, partly, from some exercise being introduced ahead to February and March”.
The gloomy progress figures will forged a pall over a cupboard “away day” convened by Prime Minister Sir Keir Starmer on Friday, at which ministers will attempt to map a path by a worsening fiscal outlook in direction of the autumn Funds.
Shadow chancellor Sir Mel Stride mentioned: “Due to Labour’s reckless selections the financial system really shrank in Could. It will pile even additional stress for tax rises within the autumn. Labour’s pricey U-turns, on winter gas and welfare, have created a ticking tax time bomb.”
Ministers on the away day will assess the harm brought about to the general public funds by the retreats over welfare reform and winter gas funds, which have blown a gap of greater than £6bn within the authorities’s fiscal plans.
Enterprise leaders are warning Reeves towards additional weakening progress by making an attempt to shut that hole by hitting enterprise and the Metropolis of London with increased taxes.
Ben Jones, CBI lead economist, mentioned: “With rising fiscal challenges and the autumn Funds on the horizon, the chancellor should present clear reassurance — no new taxes on enterprise and as an alternative supply a dedication to work alongside corporations to dismantle boundaries to progress.”
